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Important Health Care "Pay or Play" Rule and Other Developments for Employers

January 17, 2013

In the last few weeks, there have been significant developments related to health care reform and other issues that will affect employers. Most, but not all, of these developments relate to the "pay or play" rules under the federal Patient Protection and Affordable Care Act (Act) passed in 2010. Although the pay or play rules do not go into effect until 2014, their application to employers will initially hinge on the structure of the employers' workforces during 2013. Consequently, employers should immediately make themselves familiar with these new developments.

Pay or Play Rules
Beginning in 2014, an employer with 50 or more full-time employees and full-time employee equivalents during the prior calendar year must offer "minimum essential" health plan coverage to full-time employees. Otherwise, the employer must pay a monthly penalty (First Level Penalty) if any full-time employee receives federal premium assistance under a health insurance exchange during any month. The First Level Penalty equals $166.67 times the number of the employer's full-time employees in excess of 30. A full-time employee generally is one who works an average of at least 30 hours per week, and the full-time employees of certain affiliated employers must be aggregated when determining whether the pay or play rules apply.

Furthermore, even if an employer does offer minimum essential coverage to its full-time employees, it will be subject to a penalty (Second Level Penalty) for a month if (a) the "employee-only" coverage is unaffordable or does not provide minimum value, and (b) at least one full-time employee declines the coverage and receives federal assistance for coverage under an exchange. The Second Level Penalty will be $250 times the number of full-time employees who receive the federal assistance for that month. However, an employer's Second Level Penalty will not exceed its First Level Penalty.

The IRS has just issued proposed regulations which provide important guidance on the pay or play rules. Although the regulations are proposed, employers can rely on them immediately. Here are several of the key concepts covered by the proposed regulations:

  • For 2014, the proposed regulations allow an employer to determine whether it is subject to the pay or play rules on the basis of any period during 2013 that is at least six consecutive calendar months long.
  • Even though the application of the pay or play rules to an entity is determined by including employees of certain affiliated employers, each entity is considered separately when the pay or play penalties are actually calculated. For example, one employer's failure to provide coverage will not necessarily mean that an affiliated employer is subject to the pay or play penalties.
  • An employer generally will not face the First Level Penalty as long as it offers coverage to at least 95% of its full-time employees.
  • Foreign employees generally are not counted for the purpose of the pay or play rules.
  • To avoid the First Level Penalty, an employer must offer coverage to the dependent children (those under age 26) of full-time employees, but not those employees' spouses. However, during 2014 an employer does not need to offer coverage to dependent children as long as it "takes steps" during 2014 to arrange for such coverage during 2015.
  • The proposed regulations contain certain transitional rules that provide temporary relief from the pay or play rules for employers that sponsor fiscal year health plans.
  • The IRS has indicated that it will closely scrutinize an employer's arrangement with an employee leasing agency if the arrangement reduces the employer's workforce such that it is exempt from the pay or play rules.
  • The proposed regulations provide rules to address periods of unpaid leave, changes in employment status, and rehires.
  • New safe harbors for determining whether an employer's coverage is "affordable" are included in the proposed regulations.

Wellness Programs
Starting in 2014, the Act increases the reward (or penalty) employers may provide to (or impose on) employees with respect to satisfaction of certain health-related standards (e.g., weight loss, tobacco use, blood pressure reduction) under wellness programs. Until 2014, the maximum reward or penalty is 20% of the applicable cost of coverage.

Under recently issued proposed regulations, if the employer's wellness program is exclusively a tobacco prevention program, then the reward or penalty for 2014 and after may be up to 50% of the cost of coverage. However, if the employer's wellness program includes other health-contingent components, then (A) the rewards/penalties under the other component(s), when tested separately, cannot exceed 30% of the applicable cost of coverage, and (B) the rewards/penalties under all of the employer's health-contingent wellness program components (including the tobacco prevention program) may not exceed 50% of the total cost of coverage. Please note, however, employers must remain cognizant of other legal requirements associated with wellness programs (e.g., the Americans with Disabilities Act's general prohibition on involuntary medical examinations).

To comply with the Health Insurance Portability and Accountability Act (HIPAA), a health-contingent wellness program must offer a "reasonable alternative" to employees for whom it would be medically inadvisable or unreasonably difficult to satisfy the initial condition. Another change made by the proposed regulations is that if the reasonable alternative provided under a wellness program is the completion of an educational program (e.g., a tobacco cessation program), then the employer must make that program available to employees and pay for it.

Department of Labor Audits
The U.S. Department of Labor (DOL) has commenced a new initiative of audits of employer health and welfare plans to determine compliance with HIPAA, Consolidated Omnibus Budget Reconciliation Act (COBRA), the Genetic Information Nondiscrimination Act (GINA), and other federal mandates. The DOL is only allowing audited employers ten business days to produce an enormous amount of documentation. These documents include, but are not limited to, the following:

  • Plan documents
  • Summary plan descriptions
  • All insurance contracts
  • All service provider contracts
  • HIPAA certificates of creditable coverage
  • HIPAA notices of preexisting condition exclusions
  • HIPAA special enrollment right notices
  • COBRA noticesWellness program materials
  • Documents establishing compliance with federal health care reform

Given the threat of DOL audit and the substantial daily penalties that can apply for noncompliance, employers should immediately review their welfare plans, policies and procedures. Additionally, employers should organize their files to ensure they are in the position to promptly comply with the DOL's document demands. If you have any questions or need assistance, please call Todd Cleary at 414.287.9433 or 608.284.2613 or email him at

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