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Pay or Play—What Is It, What You Need to Know and Is There a Penalty in Your Future?

October 16, 2012

Pia Brown

Among other things, the Patient Protection and Affordable Care Act (ACA) imposes new obligations on “large employers". These rules (outlined in Internal Revenue Code § 4980H) will increase reporting obligations for all affected employers and may increase costs for certain employers.

“Large employer” means an employer that employed at least 50 full-time equivalent employees on business days during the preceding calendar year. Thus, whether an employer is a large employer depends on the number of full-time equivalent employees (FTEs), which includes full-time and part-time employees.  The ACA provides that a "full-time employee" with respect to any month is an employee who is employed on average at least 30 hours of service per week. (In Notice 2011-36, the IRS said that it expects that 130 hours of service in a calendar month would be treated as the monthly equivalent of 30 hours of service per week.)

The ACA will require employers to make a choice: either “Pay” a penalty for not offering group health benefits to employees or “Play” by continuing to offer such benefits.  Employers providing coverage must meet minimum coverage levels or face penalties. These penalties, in contrast to the determination of large employers, are calculated on the basis of full-time employees only and are intended to help finance the cost of coverage expansion, as follows:

  • PAY — If an employer chooses not to provide group health coverage in 2014, and at least one full-time employee obtains federally subsidized coverage through a state exchange, the employer pays a $2,000 penalty for each full-time employee (exclude the first 30 employees from this calculation.) The penalty is assessed on a monthly basis.
  • PLAY — If an employer continues to provide group health coverage in 2014, and at least one full-time employee obtains federally subsidized (see explanation below*) coverage through a state exchange, the employer penalty is equal to the lesser of:
    • $3,000 for each full-time employee receiving subsidized coverage through an exchange; OR
    • $2,000 for each full-time employee (excluding the first 30 full-time employees

      * A federal subsidy is available to an employee if at least one of the following conditions is met:

      • An employer offers employees the opportunity to enroll in a group health plan providing minimum essential coverage (MEC), but health plan premium costs for coverage are greater than 9.5% of an employee’s household income. (In Notice 2011-73, the IRS proposed the "affordability safe harbor" under which an employer would be permitted to determine affordability on the basis of an employee's income as reported on Form W-2/Box 1 instead of household income.)  OR
      • An employer’s plan covers less than minimum value. Coverage is deemed to provide minimum value and MEC if it pays for at least 60% of all plan benefits. The IRS prescribed rules governing the determination of minimum value in Notice 2012-31. That guidance establishes rules for determining minimum value based on guidance previously issued by the Department of Health and Human Services relating to actuarial value but modified to reflect differences in benefits offered and populations covered under large, fully-insured plans and self-funded plans.

In a nutshell:

Pay or Play Provision





Source: Congressional Research Service Analysis May 14, 2010

Two recent guidance items also shed light on the application of the employer-shared responsibility rules and the 90-day waiting period limitation.

  1. IRS Notice 2012-58 describes safe harbor methods that employers may use to determine which employees are treated as full-time employees for purposes of the employer-shared responsibility rules. Building on prior guidance, Notice 2012-58 clarifies an existing safe harbor for ongoing employees and provides a separate safe harbor for new hires.
  2. IRS Notice 2012-59, Department of Labor Technical Release 2012-02, and an HHS Bulletin entitled "Guidance on 90-Day Waiting Period Limitation under Public Health Service Act § 2708" each provide temporary guidance regarding the 90-day waiting period limitation.

Together these notices offer rules that are, for the most part, favorable to employers, particularly those in industries with large cohorts of contingent workers, e.g., retail, franchise, construction, hospitality and temporary staffing. But while regulators have furnished standards that are generally workable in light of the underlying statutory provisions, the resulting costs and administrative burdens are not to be understated.

Work together with your legal counsel, accounting and finance partners and your benefits consultant to define the strategy that is right for your organization.


Want to learn more? Join BlumShapiro and Ovation for an Upcoming Seminar: An Employer's Guide to Navigating Pay or Play & the Affordable Care Act



Pia Brown, Consultant, Ovation
Pia Brown has worked in the Employee Benefits arena for more than 16 years. Since joining Ovation Benefits in 2006 as a Senior Account Manager, she has progressed to Managing Consultant and now leads a team in consulting, design, and execution of Employee Benefit Programs that support and enhance each individual employer’s business strategy. Known for her shoot from the hip, consultative approach, Pia consistently helps move strategy forward. Together with her team, Pia supports employers that want more than “just benefits” for their business, their employees and their families.  Pia began her career at Anthem Blue Cross Blue Shield in their rotational internship program, spending time in provider relations, marketing, member services, underwriting, sales and account management. She was a Team Lead in the Major Account Sales unit, specializing in large employer group health, dental and ancillary program designs. Pia completed her Certified Employee Benefit Specialist (CEBS) designation from the International Foundation of Employee Benefits and Wharton School of Business in 2010.  


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