EMPLOYER PAY OR PLAY EXCISETAXES – WHERE ARE WE NOW?Starting in 2014, large employers may incur the so-called “pay or play” excise tax unless theymeet certain standards for offering health coverage to their full-time employees. An employercan control its exposure to the pay or play excise tax, but doing so generally requires measuringthe employer’s workforce and individual workers’ hours in various ways, as well as evaluating anyhealth coverage the employer offers against certain benchmarks. Recent proposed regulationsunder the pay or play provisions (along with a related set of questions and answers) provideimportant details on the measurements and evaluations that determine whether an employermight incur the excise tax.

The rules governing the pay or play excise tax are complex. Even determining which employeesare considered full-time calls for detailed analysis. For larger employers with multiple plans andemployment arrangements, it is difficult to overstate how complex applying the pay or play rulescan become. For most employers, administering plans to avoid the pay or play excise tax will bemanageable, but the employer first needs to determine which of the many options for applyingthe rules are most advantageous.

Willis’ National Legal & Research Group has prepared a comprehensive guide regarding the payor play excise tax for its clients. The guide explains our current understanding of how the pay orplay excise tax works and the options for applying the pay or play rules that employers might findmost advantageous. We provide a high-level summary of the guide here. Willis clients may accessthe guide –“Health Care Reform: Employer Pay or Play Excise Taxes Employer Guide” – onWillis Essentials (log-in credentials required) or may request a copy from their Willis HumanCapital Practice representative.

PAY OR PLAY BASICS

Despite the “pay or play” shorthand reference, these provisions are best thought of as includingtwo separate excise tax provisions. One excise tax (we call it the “cliff”) usually will be very largeif it applies, but it is readily avoidable. The other (which we call the “drop-off”) usually will besmall by comparison, but it is more difficult to avoid completely. These excise taxes apply only tolarge employers (50 or more full-time employees (or equivalents) in the last calendar year). Also,neither the cliff nor the drop-off applies unless the employer receives a certification that at leastone of its full-time employees has obtained coverage through an insurance exchange and hasqualified to receive premium assistance or cost-sharing reduction with respect to that coverage.Very generally, full-time employees are those employed for an average of at least 30 hours ofservice per week.

HUMAN CAPITAL PRACTICE

ALERT:HEALTH CARE REFORM BILLFebruary 2013 www.willis.com

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n The cliff may apply if an employer fails to offer minimumessential coverage (which includes almost any employer-sponsored medical benefits, regardless of cost or value) tosubstantially all of its full-time employees and their dependents.The cliff excise tax is $2,000 annually – $166.67 per month – forevery one of an employer’s full-time employees, (depending oncorporate structure, up to 30 of the employer’s full-timeemployees are disregarded).

n If an employer avoids the cliff, it may still incur the drop-off if itdoes not offer each full-time employee minimum essentialcoverage that is both minimum value (at least 60% actuarialvalue) and affordable (no more than 9.5% of the individualfederal poverty level or the employee’s household income, W-2pay or rate of pay). The drop-off excise tax is $3,000 annually –$250 per month – for each full-time employee for whom theemployer receives a certification of premium assistance or cost-sharing reduction, unless the cliff would be a lower amount.

The applicability and calculation of these excise taxes are explainedin our employer guide to the pay or play excise tax (see informationon obtaining a copy above).

PAY OR PLAY EFFECTIVE DATE

The pay or play provisions generally are effective for all employersand plans on January 1, 2014, regardless of plan year, so a largeemployer may incur an excise tax for January 2014 and later monthsif coverage meeting the applicable standards is not offered for thosemonths. An employer that wishes to determine whether it is a largeemployer for 2014 or to identify its full-time employees using thelook-back measurement method (as described below) must trackemployees’ hours of service during 2013 in order to implement onJanuary 1, 2014. (A complex transition rule may allow some non-calendar year plans to delay compliance until the beginning of their2014 plan year, but we do not recommend that employers rely on thatrule without obtaining a legal opinion on its applicability.)

ANALYZING AN EMPLOYER’S

OPTIONS UNDER THE PAY OR

PLAY PROVISIONS 

The pay or play excise taxes require manyemployers that cannot avoid the taxes toevaluate trade-offs between cost andadministrative complexity. To complicatematters, the trade-offs are not the same for allemployers, varying based on the size andcharacteristics of the employer’s workforce, aswell as available coverage options.

ONLY “LARGE EMPLOYERS” MAYINCUR THE PAY OR PLAY EXCISE TAX An employer is not subject to any pay or playexcise tax, regardless of what coverage it does(or does not) offer, unless the employer(including certain affiliated companies) is alarge employer (50 or more full-timeemployees [or equivalents] during the lastcalendar year). Because part-time employeesessentially count as fractions when makingthe large employer determination, a companythat has only a few employees working 30 ormore hours per week may be a large employer.There is no exemption from the pay or playprovisions for tax-exempt, charitable,religious or governmental organizations – allmay be large employers.

For many employers, it will be apparent thatthey had 50 or more full-time employeesduring the last calendar year. Otheremployers may choose to presume that they

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are large employers or may count their employees’ hours of service during the previouscalendar year to make the determination as explained in our employer guide to the pay orplay excise tax (see information on obtaining a copy above). Under a transition rule, thedetermination of whether a company is a large employer for 2014 may be made based on anyperiod of at least six consecutive calendar months during 2013.

OFFERING ALL EMPLOYEES MINIMUM ESSENTIAL COVERAGE THAT ISAFFORDABLE AND MINIMUM VALUE ALWAYS WORKS An employer will incur neither the cliff nor the drop-off if it offers all of its full-timeemployees minimum essential coverage that includes dependent coverage and, with respectto the employees’ coverage only, the minimum essential coverage is both affordable andminimum value. To limit such coverage to full-time employees, an employer must identifythose full-time employees, which may involve significant administrative difficulties (seediscussion below). For most employers, identifying full-time employees will be the mostdifficult task in connection with the pay or play provisions.

An employer could avoid those difficulties, yet still foreclose the possibility of incurring apay or play penalty, if it offered minimum essential coverage that is both affordable andminimum value to all of its employees regardless of hours worked or full-time, part-time,seasonal, temporary or other status and offered minimum essential coverage to dependents.This approach may be more practical than many would anticipate, because it appears thatminimum essential coverage that just meets the affordability and minimum value standardsis less costly than most employer plans are currently. This “all in” approach is the only waywe have identified to avoid the difficulties of identifying full-time employees while ensuringthat the pay or play excise tax will not apply.

As with many terms and phrases used in the pay or play provisions, full understanding of thephrase “offering full-time employees minimum essential coverage that is both affordableand minimum value” requires extensive explanation of detailed rules. Those rules areexplained in our employer guide to the pay or play excise tax (see information on obtaining acopy above).

OFFERING COVERAGE TO FULL-TIME EMPLOYEES IS SUFFICIENT BUT MAYBE DIFFICULTOnly full-time employees’ coverage is considered when determining whether an employerhas incurred a pay or play excise tax. While part-time employees may be excluded, anemployer that wishes to exclude any of its employees (including part-time, seasonal,temporary, etc.) from coverage will need to be able to identify and document the excludedemployees’ part-time status in order to manage its exposure to the pay or play excise taxes.For each employee to whom the employer does not offer coverage, the reason should bedocumented.

IDENTIFYING FULL-TIME EMPLOYEESA full-time employee generally is one who has an average of at least 30 hours of service perweek during a calendar month. The determination of hours of service and full-time or part-time status is made on an employee-by-employee basis, generally using actual hours ofservice. An employer’s classification of an individual employee as full-time, part-time,seasonal, temporary, etc., has almost no influence on whether the employee is a full-timeemployee for purposes of the pay or play excise tax. Because any employee may be a full-timeemployee based solely on hours of service, all employees’ hours of service must be measured

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to reliably identify all of an employer’s full-time employees. Therules regarding the hours of service that must be counted and thedefinition of full-time employee are explained in our employer guideto the pay or play excise tax (see information on obtaining a copyabove).

MOST EMPLOYERS WILL USE THE LOOK-BACK MEASUREMENT METHOD

Most employers will need to use the look-back measurement methodfor identifying full-time employees (a less difficult measurementmethod may work for employers with very simple situations). Verygenerally, this method calls for an employer to measure eachemployee’s average hours of service over a look-back measurementperiod that is between three and 12 months long, assign eachemployee full-time or part-time status based on that measurement,and continue that status throughout a period that follows themeasurement period and is usually the same length (a stabilityperiod). Between the measurement period and the stability period,an employer may have an administration period of up to 90 days.Otherwise, the stability period must start immediately after themeasurement period.

EMPLOYER CHOICES WHEN USING THE LOOK-BACK MEASUREMENT METHOD

Under the look-back measurement method, the employer choosesthe length of the measurement, administration and stability periods,as well as the dates on which these periods begin and end, subject to anumber of restrictions. There are separate rules for applying thelook-back measurement method to ongoing employees and to newemployees, and an employer must use this method with respect toongoing employees in order to be able to use it for new employees.Both sets of rules contain a daunting number of special rules,exceptions and options. There are also restrictions on changes to themeasurement, administration and stability periods. For example, anemployer may not change a measurement period nor its associatedstability period once the measurement period has started.

The best way to explain the look-back measurement method for bothnew employees and ongoing employees is by providing examples ofits operation. In our employer guide to the pay or play excise tax (seeinformation on obtaining a copy above), we provide multipleexamples, illustrating various permutations of the look-backmeasurement method as it applies to both new and ongoingemployees, as well as the many options and special rules that applywhen using the look-back measurement method. The guide alsoexplains a transition rule allowing an employer to delay the start ofits first look-back measurement period without shortening theassociated stability period, so long as the measurement period lastsat least six months and begins no later than July 1, 2013.

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Applying the Look-Back Measurement Method to New Employees May be Tricky

When an employer can use the look-back measurement method for anew employee, coverage for that employee may be delayed for morethan 13 months while the employer measures the employee’s hours ofservice, determines full-time or part-time status and offers coverageas appropriate. This delay will not result in a pay or play excise tax (orviolate the 90-day limit on waiting periods that is effective for planyears starting on or after January 1, 2014) if it is applied to a variable-hour employee or a seasonal employee. For other employees – thosewho are reasonably expected to work at least 30 hours per week onaverage – coverage must be offered in a manner that complies withthe 90-day limit on waiting periods. This means that identifying anindividual as a variable-hour or seasonal employee usually causes asignificant delay in health coverage becoming effective. As a result,whenever an employer elects to treat an individual as a variable-houremployee or seasonal employee, a best practice is documenting thecircumstances that led to that conclusion. The circumstances inwhich a new employee may be treated as variable-hour or seasonalare explained in our employer guide to the pay or play excise tax (seeinformation on obtaining a copy above).

OFFERING DIFFERENT COVERAGE TO DIFFERENT GROUPS OF FULL-TIME EMPLOYEESEmployers that must expand the group of employees eligible forcoverage in order to avoid the pay or play excise taxes may find thatthey wish to offer different levels of coverage or contributions todifferent groups of employees. Nothing in the pay or play provisionsrequires that similar levels of coverage or contributions be offered toall full-time employees. Employers that have self-insured plans aresubject to nondiscrimination rules, however, and those rules mayaffect an employer’s ability to implement these types ofarrangements. (Similar rules will become effective for insured healthplans after the relevant agencies issue implementing regulations.)Cafeteria plan nondiscrimination testing also may be affected ifrequired contributions for health coverage are paid on a pre-tax basis.

PLAYING AND PAYING

Offering coverage to employees still paying the pay or play excise taxmay sound like the worst of all possible results, but many areconcluding that doing so makes sense financially. Various options foroffering coverage and their effect on the pay or play excise taxcalculation are explained in our employer guide to the pay or playexcise tax (see information on obtaining a copy above).

STEP BACK FROM THE CLIFFMost employers have concluded that simplyoffering no coverage (i.e., incurring the cliff )is not viable because the cliff penalty is sosteep and the cost of offering minimumessential coverage that prevents it is sominimal. Even an employer that prefers tooffer no coverage should strongly consideroffering minimum essential coverage, withNO employer contributions, to all of itsemployees and their dependents just to keepopen the possibility of minimizing the pay orplay excise tax. This “failsafe” option isexplained in our employer guide to the pay orplay excise tax (see information on obtaininga copy above).

BE CAREFUL ABOUT THE DROP-OFF Employers offering minimum essentialcoverage may still incur the drop-off, andmost employers are planning to offercoverage that prevents both the cliff and thedrop-off from applying. As they work with thevarious pay or play definitions and concepts,however, some employers are finding that itmay make sense financially to risk incurringthe drop-off with respect to some employees(e.g., by offering minimum essential coveragethat meets the standards, except that it is notaffordable for some lower-paid employees).An employer might encounter this situation ifit wished to maintain uniform employeecontributions across its workforce but foundthat the cost of making the coverage availableto every full-time employee at the cost that isaffordable for its lowest-paid full-timeemployee is prohibitive. An employer in thissituation might choose higher requiredemployee contributions, so the coverageoffered would not be affordable for some ofthe employer’s lower-paid employees. In thatcase, the employer may incur the drop-offpenalty ($250 per calendar month for eachfull-time employee for whom the employerreceives a certification of assistance) withrespect to employees for whom the coverageis not affordable.

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BALANCING AFFORDABILITY AND MINIMUM VALUE Affordability is determined on an individual basis. Just because coverage is not affordablefor one full-time employee does not mean that it is unaffordable for all full-time employees.Minimum value is different. The actuarial value of coverage is the same for all individualswho are offered that coverage.

This means that an employer offering coverage that does not provide minimum value mayincur the drop-off penalty with respect to every one of its full-time employees for which itreceives a certification of assistance, even if the cost of that coverage is very low. Therefore,when considering trade-offs between the value of the coverage offered and the cost of thatcoverage, an employer will generally minimize its chances of incurring the drop-off if it leanstoward higher premiums rather than lower value. At the same time, employers purchasinginsurance coverage may find that participation and contribution requirements imposed bycarriers put them in the position of offering minimum essential coverage that does notprovide minimum value, but doing so at very low cost to employees. Employers in thissituation may still benefit from offering minimum essential coverage that has low actuarialvalue because they will not incur a pay or play excise tax with respect to employees whoaccept and pay for coverage. The very low cost of minimum essential coverage that has lowactuarial value may make it appealing to many of an employer’s lowest-paid employees, andthose that accept the coverage will be ineligible for premium tax credits or cost-sharingreductions. That, in turn, will prevent the employer from incurring the drop-off with respectto those employees.

The options available to employers and the trade-offs implicit in each are explained in ouremployer guide to the pay or play excise tax (see information on obtaining a copy above).

WHAT COMES NEXT?

While the new proposed regulations are a giant step forward in understanding exactly whatemployers must do to avoid the pay or play penalty, the preamble to the regulationsidentified a number of items to be addressed in future guidance. Those include –

n Defining seasonal employees for purposes of the look-back measurement method n Certain special issues in applying the rules to particular employers, such as churches,

governmental entities and temporary staffing organizations, among othersn Additional rules on counting hours of service when employees have certain types of

unpaid absences from employment

As always, Willis’ National Legal & Research Group will monitor developments and provideinformation as they occur.

NEW ENGLAND

Auburn,ME207 783 2211

Bangor, ME207 942 4671

Boston, MA617 437 6900

Burlington, VT802 264 9536

Hartford, CT860 756 7365

Manchester, NH603 627 9583

Portland, ME207 553 2131

Shelton, CT203 924 2994

NORTHEAST

Buffalo, NY716 856 1100

Morristown, NJ973 539 1923

Mt. Laurel, NJ856 914 4600

NewYork, NY212 915 8802

Norwalk, CT203 523 0501

Radnor, PA610 254 7289

Wilmington, DE302 397 0171

ATLANTIC

Baltimore, MD410 584 7528

Knoxville, TN865 588 8101

Memphis, TN901 248 3103

Metro DC301 581 4262

Nashville, TN615 872 3716

Norfolk, VA757 628 2303

Reston, VA703 435 7078

Richmond, VA804 527 2343

Rockville, MD301 692 3025

SOUTHEAST

Atlanta, GA404 224 5000

Birmingham, AL205 871 3300

Charlotte, NC704 344 4856

Gainesville, FL352 378 2511

Greenville, SC704 344 4856

Jacksonville, FL904 562 5552

Marietta, GA770 425 6700

Miami, FL305 421 6208

Mobile, AL251 544 0212

Orlando, FL407 562 2493

Raleigh, NC704 344 4856

Savannah, GA912 239 9047

Tallahassee, FL850 385 3636

Tampa, FL813 490 6808813 289 7996

Vero Beach, FL772 469 2842

MIDWEST

Appleton,WI800 236 3311

Chicago, IL312 288 7700312 348 7700

Cleveland, OH216 861 9100

Columbus, OH614 326 4722

Detroit, MI248 539 6600

Grand Rapids, MI616 957 2020

KEY CONTACTSU.S. HUMAN CAPITAL PRACTICE OFFICE LOCATIONS

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Milwaukee, WI262 780 3476

Minneapolis, MN763 302 7131 763 302 7209

Moline, IL309 764 9666

Pittsburgh, PA412 645 8506

Schaumburg, IL847 517 3469

SOUTH CENTRAL

Amarillo, TX806 376 4761

Austin, TX512 651 1660

Dallas, TX972 715 2194972 715 6272

Denver, CO303 765 1564303 773 1373

Houston, TX713 625 1017713 625 1082

McAllen, TX956 682 9423

Mills, WY307 266 6568

New Orleans, LA504 581 6151

Oklahoma City, OK405 232 0651

Overland Park, KS913 339 0800

San Antonio, TX210 979 7470

Wichita, KS316 263 3211

WESTERN

Fresno, CA559 256 6212

Irvine, CA949 885 1200

Las Vegas, NV602 787 6235602 787 6078

Los Angeles, CA213 607 6300

Phoenix, AZ602 787 6235602 787 6078

Portland, OR503 274 6224

Rancho/Irvine, CA562 435 2259

San Diego, CA858 678 2000858 678 2132

San Francisco, CA415 291 1567

San Jose, CA408 436 7000

Seattle, WA800 456 1415

The information contained in this publication isnot intended to represent legal or tax advice andhas been prepared solely for educational purposes. You may wish to consult your attorneyor tax adviser regarding issues raised in this publication.

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