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Minimum Essential Coverage and Play-or-Pay Tax

Play-or-Pay Tax

The “play-or-pay” tax or Employer Mandate is one of the most significant tax consequences of health care reform. The tax will take effect in 2015 (delayed from 2014), and it will have a significant impact on large employers subject to it. Both applicable large employers that offer minimum essential coverage, and those who do not offer minimum essential coverage to their employees will be subject to this tax. Employers will face another big decision due to this tax. Their question will be, “Should we offer healthcare coverage to our employees at all, or just simply pay the applicable tax?”

Employer Does Not Offer Minimum Essential Coverage

In essence, the play-or-pay tax applies to a large employer that does not offer minimum essential coverage to their full-time employees and their dependents, and at least one employee receives coverage under a qualified health plan through an Exchange and receives some sort of financial assistance, such as a premium tax credit or other subsidy. If the employer meets these conditions, then they will be subject to a play or pay penalty tax under these new regulations. The applicable penalty amount for 2014 will be $166.67 per month per employee, after an allowable 30-employee reduction. Note that the tax is assessed on a monthly basis for any month in which all the conditions are met. Also, note that the 30-employee reduction is statutorily authorized.

Pay-or-Play Calculation for Employer Not Offering Coverage

The applicable penalty amount for 2014 will be $166.67 per month per employee, after an allowable 30-employee reduction. Note that the tax is assessed on a monthly basis for any month in which all the conditions are met. Also, note that the 30-employee reduction is statutorily authorized. Employers can perform a play-or-pay tax evaluation, weighing the cost of the tax against what it would cost if they were to offer minimum essential coverage.

Employer Offering Minimum Essential Coverage

The play-or-pay tax will also be applicable to large employers that do offer minimum essential coverage, but only under certain circumstances. An applicable large employer will pay a penalty tax for any month during which:

  • The employer offers to its full time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan for the month; and
  • At least one full time employee has been certified to the employer as having enrolled for the month in a qualified health plan for which a premium tax credit or cost-sharing eduction is allowed or paid, because the minimum essential coverage offered by the employer is unaffordable to the employee.

Employer-sponsored minimum essential coverage will be considered unaffordable in two situations:

  • When the employer’s plan share of the total allowed costs of benefits is less than 60%, or
  • The premium being charged to the employee only coverage exceeds 9.5% of the employee’s household income. Generally, employees will not be eligible for a premium tax credit or other subsidy through the exchange if they are offered employer-sponsored coverage, unless one of these two circumstances applies. If either circumstance applies, the employee can apply for an affordability waiver through the exchange, and the penalty tax levied on the employer will only apply for employees that receive an affordability waiver.

The applicable penalty tax amount for offering employers is $250 a month. This tax penalty will be assessed on a monthly basis and for each employee who receives financial assistance through the exchange. There is no 30-employee reduction, and the overall penalty amount is capped at the maximum amount of penalty that would have been paid if the employer offered no coverage and was subject to the play or pay tax.

Other Types of Minimum Essential Coverage

Minimum Essential Coverege Examples.png Click image to enlarge

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