It’s a common misconception that the Affordable Care Act (ACA) mandates that large employers provide health insurance for employees. The regulations actually don’t mandate that; instead, the regulations state that employers make a choice: They can choose to offer coverage that meets at least the minimum standards OR they can choose to pay a penalty. Some may say it’s a pedantic distinction, but it’s important nonetheless.
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This distinction is what is known as “play or pay.” In this case, play refers to providing health insurance that meets all requirements of the ACA. Pay, on the other hand, refers to opting to pay the penalties instead.
While the ACA has been around for a while now, it’s still important that employers understand this distinction and remember their obligations.
Choosing to Play: What Are the Health Insurance Requirements?
In short, a large employer—those with 50 or more full-time or full-time equivalent (FTE) employees—can opt to provide health insurance to all full-time employees. In this case, an employee is considered full-time if he or she works an average of 30 or more hours in a workweek.
The health insurance provided must meet or exceed the minimum standards set out by the ACA in terms of the level of coverage provided and the affordability of the insurance.
The minimum standard for coverage means that the plan must cover all “essential health benefits” outlined in the regulations. According to HealthCare.gov[i]:
“Essential health benefits must include items and services within at least the following 10 categories: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care.”
It must also provide “minimum value,” which is defined as paying at least 60 percent of the total cost of medical services.
To be deemed affordable under the regulations, the lowest-priced offering for individual coverage only (not family coverage) cannot be priced more than 9.56 percent of annual income.
Choosing to Pay: What Are the Penalties?
For employers that opt to pay the penalties rather than provide the insurance, there are two primary penalties.
The first penalty is $2,000 for every FTE employee at the employer if no insurance is offered or if it is not offered to at least 95 percent of the full-time employees. This penalty is imposed if any single FTE employee ends up getting a tax credit for coverage purchased on the government-run health exchange. The penalty applies to the employer for all FTE employees, even if only one gets coverage and a tax credit on the exchange.
The second penalty applies in situations where coverage is offered, but it fails to meet the minimum standards in terms of coverage levels or affordability. In this case, the penalty is $3,000 per FTE employee who receives tax credits for getting his or her own coverage on the health exchange. This is an important distinction. This penalty is higher per person but applies only to the number of employees who got their coverage on the exchange; unlike the first penalty, it does not necessarily apply for all full-time employees.
Is your organization a large employer as defined by the ACA? What has your organization opted to do?
*This article does not constitute legal advice. Always consult legal counsel with specific questions.
[i] https://www.healthcare.gov/glossary/essential-health-benefits
About Bridget Miller:
Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.