Starting in 2014, the 2010 health care reform act (PPACA) requires all but small employers to offer affordable, minimum value, minimum essential health coverage to at least 95% of their full-time employees or to pay significant excise tax penalties, i.e., to "play or pay." On January 2, 2013, the IRS issued proposed regulations explaining what employers must do to "play." We explained these rules in our January 7, 2013 client alert, Overview and Practical Implications of Proposed Rules Requiring Employers to Offer Health Coverage or Pay a Penalty, available at www.paulhastings.com/publications.

Now, we are suggesting that employers consider five novel techniques for complying with the play or pay mandate or for minimizing adverse consequences, e.g., for noncompliance. At this early stage, it is impossible to be sure that each of these techniques will work, but they highlight potentially troublesome issues, and suggest ways of addressing them.

Technique #1 – An employer that would incur the $2,000 per full-time employee penalty because it will not satisfy the play-or-pay mandate for at least 95% of its full-time employees, or might not satisfy it, e.g., due to changes in the work force, almost always should offer unaffordable minimum essential coverage to the employees it would not otherwise cover. Here's why:

If the employer does not offer minimum essential coverage to at least 95% of its full-time employees, it normally would incur a $2,000 penalty per annum for each of its full-time employees in excess of 30, including those eligible for the coverage.

In contrast, if it offers such coverage to at least 95% of its full-time employees, but the coverage is not affordable (or does not meet the minimum value requirement), the employer normally would incur a $3,000 penalty per annum, but only for each employee offered unaffordable (or below-minimum-value) coverage who instead buys subsidized coverage on a PPACA-mandated state health insurance exchange.

Even though the $3,000 penalty for offering this deficient coverage is higher than the $2,000 penalty for not offering minimum essential coverage to at least 95% of full-time employees, the base on which the $3,000 penalty is levied is almost certain to be much smaller. Hence, total $3,000 penalties are very likely to be lower than total $2,000 penalties for most employers. More to the point, PPACA caps total $3,000 penalties at what total $2,000 penalties would have been. Internal Revenue Code (Code) Section 4980H(b)(2). Hence, it never will be more expensive to incur $3,000 penalties than $2,000 penalties, and the total penalties are likely to be much less.

Therefore, all employers who intend to provide play-or-pay-compliant coverage to at least some full-time employees should consider providing unaffordable, but otherwise-compliant coverage to all other employees working in the U.S., such as pursuant to the following sample provision:1

While you are employed by the Company in the U.S. but otherwise ineligible for regular, FLSA, or COBRA coverage under this Plan, this Plan will nevertheless make regular coverage available to you on exactly the same terms and conditions applicable to employees eligible for regular coverage, except that you must pay what the Company determines to be the full cost of your coverage (e.g., premiums will be age-based).2 Your premiums may exceed what the law allows the Plan to charge for COBRA coverage.

Before buying this full-cost Plan coverage, you should check to see whether a more affordable commercial insurance alternative is available to you, e.g., from a state insurance exchange.

If you want to buy this full-cost Plan coverage, please contact [name and contact information] by [deadline] to enroll in the Plan as of the next [first date of next coverage period].

If this full-cost coverage offer would cause the Plan to be viewed as illegally discriminating in favor of highly compensated employees, this offer shall be construed as being provided under an entirely separate plan.

A few issues deserve comment.

First, affected employees would have to be notified of this full-cost-coverage enrollment opportunity for it to be effective.

Second, this provision could create a discrimination issue. No one yet knows what the health plan nondiscrimination rules will be. It would be ironic if a plan that was nondiscriminatory would become discriminatory because otherwise ineligible employees are offered full-cost coverage, but the IRS has a history of issuing unnecessarily troublesome non-discrimination rules. To mitigate this potential issue, the sample provision contains a special "separate plan" provision.

Third, before embarking on this approach, employers should make sure that they will not be underpricing or overpricing full-cost coverage for any employees, resulting in adverse selection. For example, if premiums do not escalate with increasing age, the coverage likely would be underpriced for older employees and overpriced for younger employees, resulting in older employees disproportionately enrolling, which would likely force the employer to subsidize the coverage. Perhaps the easiest way to avoid this would be to price the coverage at slightly more than what comparable unsubsidized health exchange coverage would cost. If the employer prices the coverage much beyond that, the IRS might take the position that it has not "effectively offered" the coverage, possibly vitiating the entire penalty-minimization effort.

Fourth, although age-rated premiums would be a practical necessity, they are also a complication. The Age Discrimination in Employment does not bar charging older workers more for benefits if the higher charge is age-justified, but an employer who elects to age-rate premiums needs to be able to justify those premiums. See 29 C.F.R. § 1625.10(d)(4)(ii)(A).

Technique #2 – An employer that intends to satisfy the play or pay mandate should include a fail-safe provision to make sure that it does not accidentally fall short of the 95% threshold. Although there is no guarantee that this would work,3 employers should consider including a provision in their self-insured health plans4 to the following effect:

The Company intends to make affordable health coverage available to at least 95% of its full-time employees to the extent required to satisfy PPACA's employer responsibility provisions and avoid excise tax penalties. If the Plan Administrator determines that an employee who is eligible for this Plan (or would be eligible if it were written or administered in a PPACA-compliant manner) has not been given an opportunity to enroll in the Plan (e.g., because of an administrative error or classification mistake, or because he or she is ineligible) and that failure would result in the imposition of excise tax penalties on the Company, then Plan coverage shall be provided in accordance with this section to enough such employees to avoid those penalties (pursuant to any priority rules the Plan Administrator establishes, e.g., last to employees who have purchased subsidized coverage from a state health insurance exchange or who have purchased full cost Plan coverage pursuant to Section [section embodying Technique #1]).

Effective as of the earliest date needed to avoid excise tax penalties, such an employee automatically shall be covered by this Plan, and so shall his or her dependents5 if the Plan Administrator determines that they must also be automatically covered to avoid excise tax penalties. No contributions shall be charged for this coverage.

After identifying such an employee, the Plan Administrator shall notify the employee of this coverage and give the employee a reasonable opportunity to submit claims with respect to the coverage period preceding notice, notwithstanding any other time limits in the Plan or applicable law.

Coverage under this section shall end on the earlier of (1) the date it would otherwise end under the Plan for any reason other than the non-payment of premiums, or (2) the end of the calendar month beginning after the Plan Administrator sends the employee the coverage notice described in the preceding paragraph.

Thereafter, the employee, if otherwise eligible for the coverage, may continue the coverage, but the Plan Administrator may, in its discretion, increase his or her required contributions to the Plan to the highest lawful amount that will not result in PPACA excise taxes, or any lesser amount. This increased premium may continue until the employee has contributed an extra amount to the Plan equal to the contributions he or she would have had to pay for the earlier period of coverage for which no contributions were charged.

Technique #3 – Employers probably should have an effective way of answering employees who ask "Would I be better off buying coverage from the Company or buying coverage from my state insurance exchange?" Low-paid employees, particularly ones who buy family coverage, might be better off buying coverage from an exchange because of Federal subsidies. If so, they may think their employers heartless for offering them fully compliant play-or-pay coverage because that will prevent them from securing more affordable Federally-subsidized coverage.

Employers, therefore, probably should be prepared to respond to employees who ask whether they would be better off buying subsidized coverage from an exchange. Some employers may want to look into outsourcing this counseling to their TPAs or other service providers.

If it would be less expensive for an employee to buy similar coverage from an exchange, employers could try to remedy that by adopting the approach set forth in the following sample provision, although employers that do so obviously would be taking on some additional risk and expense:

Unless extended by Plan amendment, for the plan year beginning in 2014 only,6 if the Plan Administrator determines that an employee would have to pay more on an after-tax basis for coverage under this Plan than for similar coverage from a state health exchange if he or she were eligible for subsidized coverage, then the following rules shall apply:

  • The Plan Administrator shall undertake reasonable efforts to make such determinations, but shall have no obligation to make such a determination unless requested to make one by an employee who reasonably claims that he or she would save money by buying similar coverage from a PPACA health exchange.
  • If such a determination is made, the Plan Administrator also shall determine whether the money the employee would save at least equals the PPACA penalty the Company would incur for providing unaffordable coverage to the employee. If so, the Plan Administrator shall significantly increase the amount the employee must pay for Plan coverage to make it "unaffordable" under PPACA, thereby making the employee eligible both to cancel Plan coverage mid-year under the cafeteria plan rules and to buy subsidized coverage from a PPACA health exchange. (If the Plan Administrator determines that the increase is unlikely to make the employee potentially eligible for subsidized exchange coverage, his or her contributions shall not be increased.)
  • If the Plan Administrator determines that the employee would save less than the PPACA penalty the Company would incur by making coverage unaffordable, or if the employee would not then be eligible to buy federally-subsidized coverage from an exchange, the Plan Administrator shall lower what the employee must pay for Plan coverage (including family coverage if he or she has a spouse or dependents) by the amount it prescribes in its sole discretion, up to the amount the employee would save by buying comparable exchange coverage, and the Company may, at its option, pay the employee up to the balance of those savings not passed through by means of contribution reductions.
  • These special accommodations shall lapse as of the end of the calendar month in which the Plan Administrator determines that the employee would no longer be able to save money by buying coverage from a PPACA health exchange, or has failed to provide the Plan Administrator information it has requested showing that the employee still would be able to save money by buying such coverage. The Plan Administrator shall have no duty to make such a determination unless requested to make one by an employee who reasonably claims that he or she is no longer saving any money by buying coverage from a PPACA health exchange.
  • When these special accommodations lapse, the employee, if then Plan-eligible, may enroll in the Plan as of the lapse date notwithstanding any contrary Plan provisions.
  • Neither the Plan nor any other party shall be liable to anyone if the Plan Administrator fails to make any determination described in this section or makes an erroneous determination.

Technique #4 -- Use a creative contributions strategy to make sure that coverage intended to be affordable really is affordable.

Congress paid no attention to practicality when it defined "affordable" coverage as coverage that costs no more than 9.5% of an employee's adjusted household income, an amount employers will rarely, if ever, know. To remedy this, the agencies have proposed three safe harbor alternatives. The first is to use W-2 Box 1 income as a proxy for adjusted household income. The second is to use an employee's rate of pay. The third is to use the poverty line for the state in which the employee works. See Prop. Treas. Reg. § 54.4980H-5§ (e). Unfortunately, each of these alternatives has major flaws.

Many employers would be well served by applying the W-2 safe harbor on a per-pay-period basis, capping contributions in any pay period at 9.5% of W-2 Box 1 income for that pay period. Otherwise, periodic, e.g., year-end, adjustments might be needed for employees whose pay goes down, for example, if they took an unpaid or partially paid leave. Unfortunately, some payroll systems or services may not be capable of administering such a per-pay-period cap.

The rate of pay safe harbor is only available "to the extent that [the employer] does not reduce the [rate of pay of employees] during the calendar year." Prop. Treas. Reg. § 54.4980H-5 § (e)(2)(iii). This either makes this safe harbor entirely unavailable if any employees suffer pay cuts, or just as to employees who suffer pay cuts – the proposed regulations are unclear. Either way, since pay cuts are inevitable (e.g., when a full-time salaried employee switches to part-time status, his or her salary normally would be reduced to reflect his or her part-time status), the safe harbor will not necessarily be available. Hence, this safe harbor cannot be relied on unless the agencies make it available even if employees suffer pay cuts.

The poverty line safe harbor is the most robust one, but it will limit how much employees can be charged.

The proposed regulations say that an employer can use more than one safe harbor. See Prop. Treas. Reg. § 54.4980H-5§ (e)(2)(i). So consider using the following approach unless employees will not be required to contribute more than the poverty line safe harbor amount for their state:

To enroll in Plan coverage, you must agree to pay required Plan contributions, as set forth on a schedule the Plan Administrator revises from time to time. However, if you would be eligible to buy federally-subsidized coverage from an exchange (as determined by the Plan Administrator) because the contributions you would have to pay under that schedule for self-only coverage would be "unaffordable," as determined by the Plan Administrator pursuant to Prop. Treas. Reg. § 54.4980H-5 § (e)(1) (or subsequent guidance), the Plan Administrator shall reduce your self-only coverage contributions to an amount that does not exceed your highest safe harbor amount under Prop. Treas. Reg. § 54.4980H-5 § (e)(2) (or subsequent guidance) for the coverage period. The Plan Administrator may implement this reduction in any reasonable way, including by rebating to you amounts you paid in excess of the reduced contribution level no later than March 15 of the calendar year after you made those contributions. This provision shall not apply to an employee who would be better off if Plan coverage were unaffordable, to the extent provided in Section [Technique #3] or to intentionally unaffordable coverage provided pursuant to Section [Technique #1].

Technique #5 -- Try to get credit for play-or-pay-compliant coverage provided by entities that supply your company with contingent workers who your company does not regard to be its own common law employees.

The proposed play-or-pay regulations clearly stake out the position that the full-time employees to whom fully-compliant coverage must be offered to avoid play-or-pay penalties include persons the employer erroneously does not regard to be its common law employees. Very common examples include common law employees the employer erroneously regards to be independent contractors or to be solely employed by the staffing agency that provides them.

Staffing agency or similar personnel are a particular problem because some employers use hundreds or thousands of them. The proposed play-or-pay regulations, however, do not impute to the "real employers" the health coverage these employees' nominal employers (e.g., staffing agencies) offer them. Hence, if staffing agency and similar personnel are offered fully-compliant coverage by their nominal employers, but really are employed by their nominal employers' customers, the customers might violate the play-or-pay mandate when they would otherwise satisfy it if they, rather than the nominal employers, had offered that fully-compliant coverage.

Because the proposed regulations are silent on imputing staffing agencies' and similar providers' coverage to their customers, the following do-it-yourself imputation provision might be effective. If it isn't, it should do no harm.

Any company that employs personnel that it furnishes to the Company, e.g., a staffing agency, is hereby appointed the Company's agent for complying with PPACA's play-or-pay mandate with respect to such personnel to the extent, if any, that the Company erroneously fails to treat them as its common law employees. The Company's agent only shall be required to offer PPACA-compliant coverage to such personnel to the extent it promises to do so, e.g., in its contract with the Company. If the Company's agent offers PPACA-compliant coverage to personnel that the Company erroneously fails to treat as its common law employees, such coverage shall be treated as offered by the Company pursuant to this Plan solely for purposes of satisfying PPACA's play-or-pay mandate. For that sole purpose, the Plan hereby incorporates all relevant provisions of that other company's health plan. However, the obligation to actually provide and pay benefits is that other company's health plan's sole responsibility. Neither the Plan, the Company, nor any related party shall be liable if the other plan fails to pay benefits due under it.

Footnotes

1 We suggest providing unaffordable coverage rather than below-minimum-value coverage, although both would be equally effective at lowering potential play-or-pay penalties. Our rationale for preferring unaffordable coverage is that (1) it probably is necessary unless the employer is willing to subsidize the coverage, and (2) unless the employer already is offering a below-minimum-value program, the unaffordability approach avoids the need to create and maintain a new below-minimum-value health program. If the employer for other reasons will be offering such a below-minimum-value, essential health benefits plan, its penalty-reduction strategy could be to offer unaffordable coverage under just that plan.

2 If the plan permits employees to choose among coverages, it likely will make sense to limit full-cost coverage to just one option.

3 Cf. Prop. Treas. Reg. § 54.4980H-4§(b), requiring employees to have an "effective opportunity to elect to enroll (or decline to enroll) in the coverage no less than once during the plan year. . . determined based on all the relevant facts and circumstance, including adequacy of notice of the availability of the offer of coverage."

4 If insurers would underwrite retroactive free coverage under insured plans, then this approach could be used with insured plans. Sponsors of self-insured plans should make sure that stop-loss coverage would apply to the retroactive and free coverage this technique would provide.

5 As set forth in note 3, it may be necessary to offer the employee an opportunity to reject the coverage.

6 We suggest making this provision temporary so that an employer can simply permit it to lapse if it proves to be too expensive or troublesome.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.