Pay or Play? Deciding Between Providing Health Care Coverage or Taking Tax Penalties

By Katherine Muniz
October 2, 2015

As 2016 draws closer, employers are faced with determining whether they are, under the Affordable Care Act, an applicable large employer.

This determination is essential, as employers that are ALEs must sponsor a company health plan or face tax penalties, according to the Employer Shared Responsibility Provisions, also referred to as the ‘Pay or Play’ provisions.

There are multiple factors to take into consideration when contemplating which move will result in a greater financial setback for your company (to pay or play). Interestingly enough,  even employers that play by the rules could still be required to make a payment to the IRS.

Read on to learn about the associated costs and risks of each.

To ‘Play’

The Affordable Care Act states that employers with a full-time employee count of 50  and above (including full-time equivalents) are required to provide minimum essential coverage that is “affordable” and that provides “minimum value” to at least 95 percent of their full-time employees (and their dependents).

However, even law-abiding applicable large employers (ALEs) could still owe an annual employer shared responsibility payment of $3,000 for each full-time employee that receives a tax credit for purchasing coverage through the Marketplace instead. You may wonder: why would a full-time employee with an employer plan go through the marketplace to purchase insurance instead?

Usually, a full-time employee will receive a tax credit if the minimum essential coverage provided by their employer was not affordable, did not provide minimum value, or if the employee was not one of them at least 95 percent of full-time employees offered minimum essential coverage.

The total payment in this instance cannot exceed the amount the employer would have owed had the employer not offered minimum essential coverage to at least 95 percent of its full-time employees (and their dependents). Also, don’t forget that offering an employer-sponsored plan is a costly endeavor in and of itself.

To ‘Pay’

ALEs that choose not to offer a company-sponsored health plan face an employer shared responsibility payment of a different kind.

For each full-time employee that receives the premium tax credit for purchasing coverage through the Marketplace, the employer must pay a flat $2,000 annually, with the first 30 employees excluded from the calculation.

This calculation only includes full-time employees and excludes full-time equivalent employees.  Here is how an example of the calculation might go:  Penalty Calculation: 45 Total FT employees – First 30 FT employees = 15 FT employees at risk of penalty Result: 15 FT employees X 2,000 Penalty = $30,000 Total fine

According to the ObamaCare Facts site, “If only a few end up with unaffordable coverage or if that coverage doesn’t meet minimum value standards, it’s $3,000 per full-time employee who got cost assistance (but, never more than $2,000 per full-time employee). The fee is always per-month, so it’s always 1/12 of those annual totals for each month.”

The Takeaway

The cost of providing healthcare is indeed costly. One study quotes the annual cost of healthcare for a typical American family of four, covered by an average employer-sponsored health insurance plan, at around $24,671 a year.

However, according to the ObamaCare Small Business fact sheet, less than 2 percent of all firms face employer responsibility requirements, and 90 percent of firms that are considered ALEs already offer health insurance to their workers.

The remaining businesses will have to do the math and weigh which is costlier – providing a health plan or paying the tax penalties for not doing so. If your workforce is sizable enough to potentially tip your company into being considered an ALE,  FingerCheck’s new ACA compliance reports can help you track your employee numbers and employer status, and calculate your projected outcomes depending on your scheduling.

Using our tools, you can take control of your fate and make smart choices to remain compliant with the ACA.

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