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Small Business Employee Benefits and HR Blog

The Health Reform Employer Penalty: Should I Pay or Play?

Pay or Play Health Reform Tax PenaltyEmployers, human resource departments, and business consultants of all sizes are trying to wrap their heads around the Affordable Care Act (ACA) and what it means for their bottom line. One of the key questions employers with more than 50 employees should begin asking themselves is, “should I pay or play?”

To summarize this in the most basic terms, the ACA includes an employer penalty, which an employer with greater than 50 full-time equivalent employees (FTEs) is required to pay, if they choose not to offer “qualified” and “affordable” health insurance to employees. If an employer does not “play” by meeting the minimum requirements of offering “qualified” and “affordable” coverage employer penalty, then he or she will have to “pay” a penalty.

According to the health reform bill,, “applicable large employers” must offer “essential health benefits” that is “affordable” to employees. In order to determine whether it will be best for your business to pay or play, you’ll first want to have a good understanding of these three concepts:

Applicable Large Employers – If a company employed an average of 50 or more full-time equivalent employees during the previous calendar year, it is considered an applicable large employer for the current year.

Minimum Essential Health Benefits (EHB) – These are a set of health care service categories that must be covered by certain plans starting in 2014. These will vary by state, and will be finalized by each state’s Department of Insurance.

Employer Tax Penalty - If an applicable employer decides not to offer the minimum EHB by 2014, the employer may have to pay a penalty. Read how to calculate the business tax penalty here.

To determine whether an employer should pay or play, the employer should set up cost-benefit analysis comparing the cost of paying the tax penalty and offering a health reimbursement arrangement (HRA) to the cost of playing by the rules of the plan and providing affordable, Essential Health Benefits.

Health Reform and Employer Tax Penalty “Pay or Play” Cost-Benefit Analysis Variables

**FTE is the Key Variable for Businesses**

Key Question: To Offer Health Insurance or To Offer HRA? 

The answer depends on whether the:

1) Business is subject to a penalty for not offering health insurance, and

2) Cost of group health insurance > cost of HRA + penalties

BOTH #1 and #2 ARE BASED ON FTEs and # of full-time employees

How to Calculate Full-Time Equivalent Employees (FTEs)

FTEs = Full-time Employees* + Full-time Equivalent of Part-time Employees

Full-time Equivalent of Part-time Employees = Part-time Hours Worked / 120. Generally, a full-time employee is an employee who is employed on average at least 30 hours of service per week in a given month.
 

When conducting a cost-benefit analysis, the key tax issues the employer should consider are:

  • Employer Tax Penalty for Not Offering "Qualified" Group Health
    • Not applicable for employers with less than 50 FTEs
    • $2,000 penalty per full-time employee (minus 30 employee credit)****
  • Employer Tax Penalty for Offering "Qualified" Health That is Not "Affordable"
    • Not applicable for employers with less than 50 FTEs
    • $3000 per employee receiving subsidy


The Key Employee Tax Issues Include:

  • Employee Tax Subsidies on Individual Market
    • Subsidies are based on Employee's Income and Household size
    • ONLY AVAILABLE IN INDIVIDUAL STATE HEALTH EXCHANGE

  • Employee Tax Penalty for NOT Purchasing "Qualified" Health Insurance
    • Based on Employee's Income and Household size

 
**Household Income & Size are Key Variables for Individuals**

INDIVIDUAL Tax Subsidies in American Health Benefit Exchange

(Family of 4)

Income

Annual Premium

Expected Total Cost

Gov’t Premium Subsidy

$20,000

$0 (Medicaid)

$24,000

$24,000

$40,000

$2,178 (5.4%)

$24,000

$21,822

$80,000

$8,360 (9.5%)

$24,000

$15,640

Subsidy calculator available at http://healthreform.kff.org/SubsidyCalculator.aspx

Summary

It’s important to note that employee health benefits are a key factor for recruiting and retaining good employees, and canceling them should not be taken lightly.

That said, health care costs are continually rising, and employers are increasingly dropping traditional coverage in favor of more modern "defined contribution" health benefits

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