Pay or Play Health Reform Tax Penalty

Pay or Pay Employer Guide

Pay or Play Employer Guide

Tick! tick! tick!  As the 2014 Employer Mandate to either pay or play  gets closer the nation’s employers move a step closer to having to make a decision: Do I play or pay? This Employer mandate under Patient Protection and Affordable Care Act (PPACA)  does not apply to smaller groups under 50 FTE (full time equivalent) employees.  Many small groups such as food service industry, retailers, construction etc. in fact have many FTE and while they may work minimal hours can trigger the “pay or play” mandate.

The IRS has released recently guidance published in the form of a Notice of Proposed Rulemaking (NPRM), addresses a number of issues tightly linked to an array of practical considerations related to the employer mandate.  These include defining a “large employer,” determining “full-time” status for employees, clarifying the meaning of “dependents,” and determining what constitutes “affordable” coverage.

The guidance also tackles several stickier questions such as how and whether to count foreign or seasonal workers, as well as how to calculate the full-time status of employees who work unusual hours, such as teachers or airline pilots.

Three safe harbors relating to the provision of “affordable” coverage to employees in order to avoid exposure to the mandate penalties are also included in the guidance.  Transition relief is offered in recognition of certain employers’ needing time to bring their plans into compliance.

Still, there are several regs that the IRS is awaiting commentary and resolution on due on March 18, 2013.

A Q&A summary of the rule has been released by the IRS and is available by clicking here.

Some employers assert that the play-or-pay mandate will raise their costs and force them to make workforce cutbacks. As a result, a number are considering eliminating their health care coverage altogether and instead paying the penalty on their full-time employees. While the “pay” option might be worth considering, there are strong reasons why employers should look carefully at all of their options and do their best to calculate the actual outcomes of each.

Other Key Issues Addressed in the Proposed Rules
Additional issues addressed in the proposed regulations include:

  • Determining which employers are subject to the “pay or play” requirements;
  • Determining who is a full-time employee, including approaches that can be used for employees who work variable hour schedules, seasonal employees, and teachers who have time off between school years;
  • Determining whether coverage is affordable and provides minimum value; and
  • Calculating the amount of the penalty due and how the penalty will be assessed.

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



Jungle Corp. has 100 full-time employees and is a leader in its market, using a talent differentiation strategy. Jungle’s family coverage costs $15,000, of which employees pay $3,000. Bob Smith, a highly skilled worker with a strong performance record, earns $50,000 and has family coverage through Jungle’s plan.

On Jan. 1, 2014, Jungle Corp. announces it is dropping its group health plan coverage and will instead pay the $2,000-per-full-time-employee penalty. On Jan. 2, Bob walks into HR and asks about receiving replacement compensation for the $12,000 that the business had been paying toward his family coverage.

Wanting to retain Bob in accordance with its strategy of maintaining market leadership with an experienced workforce, Jungle offers him another $12,000. But clever Bob points out that his share of Social Security and Medicare payroll (FICA) taxes will take a bite out of that $12,000, as will federal and state income taxes, so the HR manager agrees to make good on those amounts as well. Of course, the company will also have to pay its share of FICA taxes on Bob’s additional compensation. As a result, instead of paying $12,000 toward Bob’s family coverage using pre-tax dollars, Jungle Corp. now finds itself paying an additional:

  • Bob’s salary adjustment: $14,500
  • Employer’s share of FICA taxes: $1,109
  • Excise tax (penalty): $2,000
  • Total: $17,609
    (versus $12,000 currently)

Similar per-employee costs will be reflected across the company’s workforce. A move that seemed like a no-brainer, the consequences could make you look silly.

For More Information
Due to the complexity of the law in this area, and the absence of finalized guidance, employers are strongly advised to review their benefit plans  to  prepare for the changes ahead.  Additional information regarding the penalty is featured on our Employer Shared Responsibility page.

Ask us about our Health Care Reform Compliance Audit Assessments. See Health Care Reform Timeline and Preparing for Reform by UHC.

In the coming months, Millennium Medical Solutions Inc will host seminars and will share information you’ll need to know as the countdown continues to October 1st.   Please contact us for immediate information on how to implement these initiatives for your group-specific needs at or  Call (855) 667-4621.

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