Pay or Play FAQ

Pay or Play FAQ

Many follow up questions on the post Pay or Play Employer Guide have been raised.  A Pay or Play FAQ hopefully adds some clarification.       Pay or Play Health Reform  Employer Tax Penalty

Will I be required to offer health insurance coverage to my employees? 

No. However, if you have at least 50 full-time employees, and you don’t offer coverage, you will owe a penalty starting in 2014 if any full time employee is eligible for and purchases subsidized coverage through an exchange. This penalty is called the “free rider” penalty.

We employ about 40 full-time employees working 30 or more hours per week   and about 25 part-time or seasonal employees. So we are not subject to the  employer mandate penalties, right?

You may be. The health reform law does not require you to provide coverage for  employees working on average less than 30 hours per week (“part-time”).  However, the hours worked by part time employees are counted to determine whether you have at least 50 full-time employee equivalents and therefore are subject to the employer mandate. This is done by taking the total number of monthly hours worked by part time employees (but not to exceed 120 hours for any  one part-time employee) and dividing by 120 to get the number of “full time  equivalent” employees. You would then add those “full-time equivalent”  employees to your 40 full-time employees.

The hours worked by seasonal employees are also counted to determine whether you have at least 50 full-time employee equivalents and therefore are subject to the employer mandate. For purposes of determining whether you are a large employer, seasonal employees are workers who perform labor or services on a seasonal basis (i.e. exclusively performed at certain seasons or periods of the year and which, from its nature, may not be continuous or carried on throughout the year) for no more than 120 days during the taxable year and retail workers employed exclusively during holiday seasons. There is an exemption from the employer mandate that says you would not be considered to employ more than 50 full-time employees if:

  • Your workforce only exceeds 50 full-time employees for 120 days, or fewer, during the calendar year; and
  • The employees in excess of 50 who were employed during that 120-day (or fewer) period were seasonal workers.

Our workforce numbers go up and down during the year. How do we determine if we had at least 50 full-time employees on business days during the preceding calendar year?

For purposes of determining if you are a large employer, the formula requires the  following steps:

1.Determine the total number of full-time employees (including any full-time seasonal workers) for each calendar month in the preceding calendar year;

2.Determine the total number of full-time equivalents (including non-full-time seasonal employees) for each calendar month in the preceding calendar year;

3.Add the number of full-time employees and full-time equivalents described in Steps 1 and 2 above for each month of the calendar year;

4.Add up the 12 monthly numbers;

5.Divide by 12.  If the average per month is 50 or more, you are a large employer.

So if we offer coverage to our full-time employees, we will not have to pay a penalty? 

Not necessarily. If you have at least 50 full-time employees and you offer coverage to at least 95% of your full-time employees, you are still subject to a penalty starting in 2014 if:

1.A full-time employee’s contribution for employee-only coverage exceeds 9.5% of the employee’s household income (Note: see below regarding a proposed affordability “safe harbor”) or the plan’s value is less than 60%; and

2.The employee’s household income is less than 400% of the federal poverty level; and

3.The employee waives your coverage and purchases coverage on an exchange with premium tax credits.

The penalty will be calculated separately for each month in which the above applies. The amount of the penalty for a given month equals the number of full- time employees who receive a premium tax credit for that month multiplied by 1/12 of $3,000.

We have more than 50 full-time employees so we are subject to the employer mandate penalties. How do we know which of our employees is considered “full-time” requiring us to pay a penalty if they qualify for premium tax credits at an exchange (if the employee has a variable work schedule or is seasonal)?

Through the end of 2014, for purposes of the employer mandate penalties, the guidance permits you to use a “look-back measurement period/stability period” safe harbor to determine which of your employees are considered full-time employees. You may use a standard measurement/stability period for ongoing employees, while using a different initial measurement/stability period for new variable and seasonal employees

How do the full-time employee safe harbors work for new hires?

They are generally based on the employee’s hours worked, or, the amount of hours the employee is reasonably expected to work as of their hire date.

  •  New employee reasonably expected to work full-time (i.e. 30 or more hours per week)– If you reasonably expect an employee to work full-time  when you hire them, and coverage is offered to the employee before the end of the employee’s initial 90 days of employment, you will not be subject to the employer mandate payment for that employee, if the coverage is affordable and meets the minimum required value.
  •  New employee reasonably expected to work part-time (i.e. less than 30 hours per week)-– If you reasonably expect an employee to work part-time and the employee’s number of hours do not vary, you will not be subject to the employer mandate penalty for that employee if you don’t offer them coverage.
  •  New variable hour and seasonal employees – If based on the facts and circumstances at the date the employee begins working (the start date), you cannot determine that the employee is reasonably expected to work on average at least 30 hours per week, then that employee is a variable hour employee. Because the term “seasonal employee” is not defined for purposes of the employer responsibility penalty, through 2014, you are permitted to use a reasonable, good faith interpretation of the term “seasonal employee”. The IRS has indicated that any interpretation of the term “seasonal” probably would not be reasonable if it included a working period of more than six months. Once hired, you have the option to determine whether a new variable hour or seasonal employee is a full-time employee using an “initial measurement period” of between three and 12 months (as selected by you).You would measure the hours of service completed by the new employee during the initial measurement period to determine whether the employee worked an average of 30 hours per week or more during this period. If the employee did work at least 30 hours per week during the measurement period, then the employee would be treated as a full-time employee during a subsequent “stability period,” regardless of the employee’s number of hours of service during the stability period, so long as he or she remained an employee. The stability period must be for at least six consecutive calendar months and cannot be shorter than the initial measurement period. If the employee then didn’t work on average at least 30 hours per week during the measurement period, you would not have to treat the employee as a full-time employee during the stability period that followed the measurement period, but the stability period could not be more than one month longer than the initial measurement period.

Example – Facts:  For new variable hour employees, you use a 12-month initial measurement period that begins on the start date and apply an administrative period from the end of the initial measurement period through the end of the first calendar month beginning on or after the end of the initial measurement period.

Situation:  Dianna is hired on May 10, 2014. Dianna’s initial measurement period runs from May 10, 2014, through May 9, 2015. Dianna works an average of 30 hours per week during this initial measurement period. You offer affordable coverage to Dianna for a stability period that runs from July 1, 2015 through June 30, 2016.

Conclusion:  Dianna worked an average of 30 hours per week during her initial measurement period and you had (1) an initial measurement period that does not exceed 12 months; (2) an administrative period totaling not more than 90 days; and (3) a combined initial measurement period and administrative period that does not last beyond the final day of the first calendar month beginning on or after the one-year anniversary of Dianna’s start date. Accordingly, from Dianna’s start date through June 30, 2016, you are not subject to an employer mandate penalty with respect to Dianna because you complied with the standards for the initial measurement period and stability periods for a new variable hour employee. However, you must test Dianna again based on the period from October 15, 2014 through October 14, 2015 (your first standard measurement period that begins after Dianna’s start date) to see if she qualifies to continue coverage beyond the initial stability period.

Pay or Play FAQ

Employee FT Testing Period Chart

As you can tell, there are many things to consider as you map out your plans for how your business is going to proceed with health care reform. Millennium Medical Solutions Corp hopes to be a valuable resource in the weeks and months ahead as you make these decisions. What about you? Do you have any glaring questions that we could answer for you about health care reform compliance?

For a FREE Affordable Care Act Guide  leave your questions in the comments below or click the “Contact Us” button and we’ll do our best to answer your questions.

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Please refer to the IRS Notice in the links below for more details and examples:

Notice 2012-58:

Announcement 2012-41:

Internal Revenue Bulletin for Announcement 2012-41:

DISCLAIMER: We share this information with our clients and friends for general informational purposes only. It does not necessarily address all of your specific issues. It should not be construed as, nor is it intended to provide, legal advice. Questions regarding specific issues and application of these rules to your plans should be addressed by your legal counsel.

Pay or Play FAQ

Pay or Play Employer Guide

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.

What does FTE(Full Time Equivalent) mean?

To determine the FTE (Full Time Equivalent) you must count FT and PT employees.  Full Time Employees are those working 30 hours+/week.* The number of full-time employees excludes those full-time seasonal employees who work for less than 120 days during the year.4 The hours worked by part-time employees (i.e., those working less than 30 hours per week) are included in the calculation of a large employer, on a monthly basis, by taking their total number of monthly hours worked divided by 120.

For example, a firm has 35 full-time employees (30+ hours). In addition, the firm has 20 part time employees who all work 24 hours per week (96 hours per month). These part-time employees’ hours would be treated as equivalent to 16 full-time employees, based on the following calculation:

20 employees x 96 hours / 120 = 1920 / 120 = 16

Thus, in this example, the firm would be considered a “large employer,” based on a total full-time equivalent count of 51—that is, 35 full-time employees plus 16 full-time equivalents based on part-time hours.

This blog is not intended to represent legal advise and one should consult with a tax and/or legal expert.

* IRC 4980H(c)(4)

Disclaimer: This blog is not intended to represent legal advise and one should consult with a tax and/or legal expert.