The Pay or Play Penalty Under the Affordable Care Act: Emerging Issues

Abstract

The Affordable Care Act does not require that employers provide employees with health care coverage. It does, however, impose an excise tax on large employers that fail to offer their employees affordable employer-sponsored health care coverage. The excise tax, commonly referred to as a “pay-or-play penalty,” was scheduled to go into effect beginning in 2014. The United States Treasury Department, however, has delayed enforcement of the penalty until 2015 for employers with 100 or more full-time employees, and until 2016 for employers with 50 to 99 employees.

Implementation of the pay-or-play penalty has given rise to a host of questions and a great deal of uncertainty and consternation among employers, particularly among small to medium-sized employers. Issues range from very narrow technical questions, such as how to calculate the hours of service of adjunct faculty and airline pilots, to broad planning questions, such as how an employer might restructure its workforce to avoid the penalty. This Article focuses on emerging issues in two specific areas, (1) spousal and dependent coverage and (2) “workforce realignments,” that is, employers’ efforts to reduce the size of their workforce or employees’ hours to avoid the pay-or-play penalty.

This Article begins by providing an overview of the pay-or-play penalty. It then discusses two issues with respect to spousal and dependent coverage: (1) determining the affordability of dependent coverage, and (2) employers’ recent reductions in spousal coverage. It then analyzes whether employers’ efforts to realign their workforces in order to avoid the pay-or-play penalty are likely to violate Section 510 of the Employee Retirement Income Security Act and/ or the Affordable Care Act’s whistleblower provision. Included in this discussion is an analysis of whether an employer would violate the ACA whistleblower provision if it threatens to terminate the employee if the employee purchases subsidized health insurance on a health insurance exchange.

Keywords: Affordable Care Act, excise tax, health care, tax, tax policy, health law, employer, employee, health insurance, insurances, pay-or-play, ERISA