Benefit Innovators

Health Benefits and

Actuarial Consulting



Please enjoy our blog and we do encourage relevant comments and feedback.  If you are a group health broker or consultant that could benefit from providing your clients enhanced analytical and cost information about their benefits, please check out the rest of our website.  We work behind the scenes to help you provide your clients better information to make decisions with.

Pay or Play Definitions

Below are a few common Pay or Play terms and their definitions, but before we get into those we better define Pay or Play.  Pay or Play simply means the decision of an employer to pay employer shared responsibility penalties or play by the law and offer affordable coverage to all full time employees.  The following terms are relevant to all applicable large employers starting in 2015 when employer shared responsibility taxes begin.

Employer Shared Responsibility Taxes – this is the term for the penalties employers may incur under 4980H if that employer either:
1.  Does not offer minimum essential coverage to at least 95% of all full time employees.  The penalty for failing to do so is $2,000 (with healthcare index increases starting in 2015) times the total number of full time employees minus the first 30 if at least one of those employees receives a subsidy at an exchange.
2.  Does not offer a plan that provides minimum value and that is affordable to each full time employee.   The penalty for failing to do so is $3,000 (with healthcare index increases starting in 2015) times the number of employees for which the employer fails to offer minimum value and affordable coverage AND that go to the exchange and receive a subsidy.  The aggregated $3,000 penalties will not exceed what the penalties would have been if no coverage was offered.
These penalties are not tax deductible expenses.

Applicable Large Employer – only applicable large employers will possibly incur employer shared responsibility taxes.  An applicable large employer is one that employs at least 50 full time employees plus full time equivalent employees.  Different measurement periods may be considered in determining if an employer is an applicable large employer.

Full Time Employee – employees that work 30 or more hours per week are classified as full time under PPACA, regardless of the definition used by the employer for benefits.  There are special rules for variable hour and seasonal employees and employer plans may have up to a 90 day waiting period before the employee must be offered coverage.

Full Time Equivalent Employee – employees that work fewer than 30 hours per week are aggregated into FTEs for the purpose of determining applicable large employer status.  For example if two employees each work 15 hours a week, they are each 0.5 FTEs and together equal 1.0 FTE.  This aggregation of part time employees into FTEs is only relevant in the determination of applicable large employer status. 

Minimum Essential Coverage – this term is not defined in the law other than to exclude certain types of coverage.  So in general terms, a benefit plan that provides medical benefits to employees is considered minimum essential coverage.

Minimum Value – 60% actuarial value.  Any plan that does not provide minimum value may result in shared responsibility penalties to the employer.

Actuarial Value – the actuarial value of a benefit plan is the percentage of claims paid by the plan, as opposed to paid by the participant through deductibles, copays or coinsurance or because of benefit limits.  For example, a plan that pays 80% coinsurance on all services would have an actuarial value of 80%.  So simply put, it is a measure of the cost sharing of a benefit plan.  However, it is only applicable to claims for individual members and their in network claims that fall within the essential health benefit categories.  In other words, services that are out of network or not an EHB are not part of the equation, nor is any family cost sharing.  When put all together, the equation is:
(In network EHB claims paid by the plan for the average individual) / (In network EHB claims incurred by the average individual)

Affordable – under the affordable care act, affordability is defined as an employer plan that requires an employee to pay 9.5% or less of household income towards EE only coverage.  So if the employee contributions towards EE only coverage are less than or equal to 9.5% of that employee’s household adjusted gross income, that plan is affordable to that employee.  An affordable plan must be offered to all employees to avoid the possibility of shared responsibility penalties.  There are three affordability safe harbors for employers to ensure they do not incur any such penalties using the W2 income with the employer, the federal poverty level and the rate of pay.

2 comments | Add a New Comment
1. steve-o | July 23, 2013 at 02:19 AM EDT

This is good summary.

One small correction:

In the Affordable section, you may want to correct it to be 9.5% of the employee's W-2 wages. Originally the feds were mulling 9.5% of household income, but the final regs say W-2 wages.

2. Brad Vernon | July 23, 2013 at 03:28 PM EDT

steve-o thank you for the comment. The definition of affordability is based on household income. The W-2 test that you are referring to is an IRS safeharbor for employers to use to ensure they don't incur any penalties. Most people have started describing affordability as this W-2 safeharbor test, but the fact remains that if the employer provides EE only coverage that is less than 9.5% of household income, it is affordable. So if either the household income test, of the W-2 safeharbor test is \passed\, the employee will not trigger a penalty to the employer.

Add a New Comment

(Enter the numbers shown in the above image)