Affordable Care Act: Play or Pay?

May 16, 2013

Should we play or pay? Employers with over 50 employees are trying to figure out how to deal with the Affordable Care Act's "employer mandate" which requires applicable large employers to either offer health insurance, or else pay a tax penalty. The employer mandate penalty goes into effect in 2015 for employers with 100+ employees, and goes into effect in 2016 for employers with 50-99 employees. 

But what employers should be asking is: how can I take advantage of the Affordable Care Act (ACA) individual insurance premium tax subsidies and actually save money on health care costs?

Play or Pay Guide, ACA Play or Pay

Play or Pay Defined

First, what does play or pay mean? Play or pay is a concept that requires employers with over 50 FTE employees to provide health insurance to their employees ("play") or pay a tax or premium toward a publicly provided system that covers people without private insurance ("pay"). The ACA play or pay requirement is also referred to as the "employer mandate" or "employer shared responsibility."

The Play or Pay Decision ... and how to Play Differently

Many employers are asking should we play, pay, or play differently with a defined contribution plan? The decision is not always easy or straightforward. Ultimately, employers want to provide a health benefit that is valuable to employees (i.e. recruitment and retention), and has value to the employer (i.e. the best benefit for the cost). The three choices an employer for employers with over 50 employers are to play, pay or play differently with defined contribution.

  • To play means your company would offer employees health insurance that meets essential health benefits and is affordable to employees, by ACA standards.

  • To pay means your company would choose to not offer health insurance and instead pay a tax penalty. (Tip: many companies who plan on paying, simply think of the tax penalty as a contribution to their employee's health benefits)

  • To play differently is the middle ground between play and pay. It means your company chooses not to offer a group health insurance plan, pays any applicable penalties, and instead offers employees a health benefits allowance (called “Pure Defined Contribution”). Employees purchase policies from an insurance agent, online, or through the new health insurance marketplaces. Then, the company reimburses employees for their policies tax-free up to the amount of their allowance.

Why Would an Employer Play Differently?

An employer would consider playing differently because it will likely:

  • Save employees and employers a combined 50% on health insurance costs.

  • Allow employees a full choice of health insurance plans.

  • Provide employees with better, more flexible health insurance options.

With the new Individual Health Insurance Marketplaces (guaranteed-issue and affordable because of the insurance premium tax subsidies), defined contribution plans now have all the same benefits of a group health insurance plan at a lower cost for the employer and employees.

Defined Contribution & Employee Health Insurance Cost Analysis

To decide whether to play, pay or play differently with a defined contribution plan, an employer with over 50 employees should conduct a simple cost analysis. Compare the cost of the three options:

  1. Qualified, affordable group health insurance

  2. Defined Contribution Plan + applicable penalties

  3. Penalties  

Less Than 50 Employees?  No Play or Pay Decision

If your company has less than 50 employees, the mandate and tax penalty (and thus the play or pat decision) does not apply to you. With the new health insurance marketplaces and insurance tax subsidies, many small employers will:

  • Drop their group health insurance plan (if they have one).

  • Allow employees to purchase policies through their state health insurance exchange and be able to take advantage of individual tax subsidies.

  • Reimburse employees for their premiums (or a portion of their premiums) through the defined contribution plan (a stand-alone Health Reimbursement Arrangement).

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