What does pay or play mean in health insurance?

If your company has grown significantly since you first opened its doors, you may have new responsibilities under the Affordable Care Act (ACA). One of the most important provisions of the ACA is the “pay or play” rule. If you’re a new large employer, you may ask yourself: “Am I required to offer health insurance coverage to my employees? And what happens if I don’t?”

This article explains the pay or play mandate so you can determine which option is best for your company and your employees.

In this blog post, you’ll learn:

• The employee health insurance requirements under the ACA’s employer mandate.
• The difference between “pay” and “play” options and the financial consequences of each choice.
• How an individual coverage HRA (ICHRA) can help you satisfy ACA requirements while controlling costs.

What is the ACA employer mandate?

“Pay or play" directly refers to the ACA’s employer mandate. So, first, let’s briefly review what the mandate entails.

The employer mandate is more formally known as the ACA's employer shared responsibility provisions (ESRP). Only applicable large employers (ALEs)—or companies that employ at least 50 full-time equivalent employees (FTEs)—are subject to the mandate. Organizations with fewer than 50 FTEs aren’t required to comply with these ACA regulations.

Below is what the employer mandate requires:

1. You must offer at least 95% of your full-time workers and their dependents a health insurance benefit that provides minimum essential coverage (MEC).
2. In addition to MEC, the IRS must consider your health insurance coverage to be affordable. This means an employee’s portion of the health plan’s premium can’t exceed 9.02% of their household income in 2025. The government adjusts this amount annually for inflation.
3. Your health plan must also meet minimum value standards. Under the ACA, the policy must pay for at least 60% of covered healthcare costs for the standard population.

Large employers report compliance annually with IRS Forms 1094-C and 1095-C.

What does “pay or play” mean in health insurance?

Now that you understand the employer mandate, let’s review the two options available to ALEs: to pay or to play.

Pay

If you’re an ALE that chooses not to comply with the employer mandate — meaning you don’t offer your full-time employees health coverage that meets the requirements — you’ll risk paying a tax penalty to the IRS. The federal government calls these penalties “employer shared responsibility payments.”

You’ll pay these penalties if at least one full-time worker buys individual health coverage with a premium tax credit on a public exchange, such as the federal Health Insurance Marketplace or state-based exchanges.

Under the employer shared responsibility rules, the 2025 penalties are as follows:

The IRS may fine you for both penalties during the same calendar year. But, if you’re noncompliant on both mandate requirements in the same month, your penalty amount can’t exceed the amount the IRS would assess under Section 4980H(a). This is the case even if your Section 4980H(b) fee is greater than the Section 4980H(a) monthly penalty.

Play

If you decide to play, you’ve chosen to offer an employee health benefit that meets the employer mandate requirements to avoid paying the penalty. Some employers prefer to pay the penalty because they believe it’s cheaper than providing a comprehensive health benefit to their staff. But regardless of the employer mandate, providing health benefits has many advantages.

By offering a health benefit, you’ll be able to attract and retain talented employees, stand out amongst your competitors, and maintain a happier workforce. This can make providing health insurance coverage to your employees a bigger win than simply avoiding paying the penalty.

How an ICHRA can help you “play” on a budget

Traditional group health insurance is the most common way to satisfy the employer mandate if you choose to play. But group plans often come with challenges: high annual premiums, strict participation requirements, and unpredictable rate hikes during renewal periods.

The individual coverage health reimbursement arrangement (ICHRA) is an alternative method that saves time, money, and administrative burden. With an ICHRA, employers can reimburse employees tax-free for individual health plan premiums and out-of-pocket expenses, without signing up for group health insurance.

The way it works is simple. You set a monthly tax-free allowance that employees use to buy health coverage and qualified medical costs. When they submit proof of a purchase, you review and approve the expense, and reimburse them up to their set allowance amount.

The ICHRA can satisfy the employer mandate for ALEs. Employees must enroll in a policy that meets MEC to participate in the benefit, and all health plans sold on public health exchanges already provide MEC and minimum value. When designing your benefit, you can use affordability safe harbors to ensure the ICHRA allowances you offer are budget-friendly.

However, there are other benefits to opting for an ICHRA that group health insurance can’t beat.

Below are a few ways the ICHRA works for any company size and budget:

1. The ICHRA is for employers of all sizes as long as they have at least one W-2 employee. Unlike group health plans, there are no minimum participation requirements.
2. There are no minimum or maximum contribution limits with an ICHRA. You can set whatever allowance works best for your company’s budget without fear of rate hikes or additional costs at the plan year’s end. As long as your allowance is affordable, it satisfies the mandate.
3. Once an employee hits their monthly allowance limit, they can’t exceed it. Additionally, any unused funds at the end of the plan year stay with you. This ensures you have cost predictability over your annual benefits budget.
4. You can adjust allowances and eligibility by age, family size, or job-based employee classes, such as salaried or hourly workers.
5. ICHRA reimbursements are tax-deductible and free of payroll taxes for employees and income-tax-free for participating employees.

An ICHRA gives your workforce the freedom to choose the coverage that fits their unique needs while providing your growing business with financial peace of mind.

Conclusion

Understanding the “pay or play” provision is vital for any employer new to ACA requirements. Whether you choose to offer a health plan that complies with the mandate or opt to pay the associated penalties, it’s a strategic decision with financial and compliance implications.

If you choose to play, you have health coverage options beyond traditional group plans. An ICHRA offers greater flexibility, cost control, and employee satisfaction. If you’re ready to provide your employees with an ICHRA, PeopleKeep by Remodel Health can get you started.

Schedule a chat with an HRA specialist today, and we’ll help you design a benefit that fulfills your ACA compliance obligations.