ACA Play-or-Pay Safe Harbor: Will It Benefit You?

Employers with more than 50 full-time employees must offer health insurance to their employees, as mandated by the Affordable Care Act (ACA). Failure to do so will result in the assessment of an excise tax penalty. This dichotomy is commonly known as the “play or pay” rule under the ACA.

The penalty is assessed for any month that an employee who is considered full-time is not offered coverage and instead buys coverage on the exchange and gets a subsidy. Where it gets tricky is for employers with part-time employees who occasionally work full-time hours.

It gets tricky because the penalty is assessed monthly, not annually. Therefore, a situation could easily arise in which an otherwise part-time employee who uses the exchange to get his or her insurance (and gets a subsidy as a result) could temporarily work full-time hours over the course of a month. When this occurs, it means he or she should have been offered the employer’s coverage for that month, and if that didn’t happen, then the employer could be penalized.

Is this just an inevitable outcome for employers with employees who have variable hours? Not necessarily. The safe harbor rules are meant to minimize this.

What Are the Safe Harbor Rules?

To address this situation, the Internal Revenue Service issued safe-harbor guidance to help employers identify full-time employees for purposes of calculating any penalties due under the play-or-pay provisions of the ACA.

Employers are not required to use the safe harbor method when calculating who is considered a full-time employee, but it may benefit some employers to do so.

With the safe harbor rules, an employer can use a period of several months (called the initial measurement period) to measure whether or not someone goes over the hours requirement to be considered full-time.

Then there’s an administrative period in which you determine the hours of service for the affected employee. If the employee averaged 30 or more hours per week during that time, then you have to treat the employee as full-time throughout a corresponding stability period, regardless of actual hours worked during the stability period. This eliminates the possibility of inadvertently not offering an employee coverage who actually qualifies. It shifts the timeframe where the coverage must be offered.

“If you are an employer who has a large population of employees who you treat as part time, but who might have a significant number of months with the requisite hours, then the safe-harbor method is probably going to become something attractive to you—provided you understand how it really works.” Ashley Gillihan explained in a recent BLR webinar.

The net result is that an employee who qualified as full-time during the measurement period must be treated as such during the stability period, regardless of hours being worked during the stability period. That means they must be offered coverage, and if not, then they could go to the exchange, get a subsidy, and the employer could have a penalty anyway.

This is a very broad overview of how the safe harbor rules work and when they might be beneficial. If you think this might apply to you, remember that there are many more considerations to bear in mind when implementing your program. There are a lot of details that must be handled properly, such as the length of each period, and how each classification of employee is treated when it comes to counting hours worked.

For more information on how the ACA play-or-pay safe harbor rules work, order the webinar recording of “ACA’s Play-or-Pay Safe Harbors and Guidelines: How to Determine If You Have to Pay.” To register for a future webinar, visit http://store.blr.com/events/webinars.

Attorney Ashley Gillihan is counsel in the Atlanta office of Alston & Bird LLP. He focuses his practice exclusively on health and welfare employee benefit compliance and litigation issues for employers, health plan administrators, and other health and welfare benefit plan service providers.