IRS Releases Proposed Regulation on Play or Pay Mandate

Starting in 2014, the Play or Pay mandate requires large employers (those with 50 or more full-time employees, including full-time equivalent employees) to either “play” by offering affordable health coverage to their full-time employees and their dependents, or “pay” a penalty by failing to provide affordable health coverage and at least one full-time employee receives a premium tax credit to help purchase coverage through an Affordable Insurance Exchange.

There are two potential penalties that could be imposed on an employer for failure to satisfy the mandate (both non-deductible for tax purposes). The first penalty, the “no coverage” penalty, is based on whether an employer fails to offer group health plan coverage to its full-time employees and their dependents. The annual penalty in this case is $2,000 per full-time employee (minus 30 full-time employees) if at least one employee receives a premium tax credit for Exchange coverage. The second penalty, the “unaffordability” penalty, applies when an employer offers coverage that fails to meet certain affordability and minimum value requirements. The annual penalty in that case is $3,000 for each full-time employee who receives a premium tax credit for Exchange coverage, but no more than what the “no coverage” penalty would be if it applied.

The Proposed Regulations clarify that an applicable large employer may avoid the “no coverage” penalty by offering coverage to all but 5% of its full-time employees and their dependents. However, if any of the employees in the small group of full-time employees who are not offered coverage receives premium tax credits for Exchange coverage, the employer will be required to pay the “unaffordability” penalty for that employee.

The IRS has posted more information on the Proposed Regulations and additional guidance to employers.

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