“The Court today decides to save a statute . . . [and] rules that what the statute declares to be a requirement with a penalty is instead an option subject to a tax.” National Federation of Independent Business v. Sebelius, 567 U.S. ______ (2012), dissenting opinion.

In the summer of 2012, the United States Supreme Court ruled that the Patient Protection and Affordable Care Act of 2010 (“Affordable Care Act”) is constitutional – with one slight modification. The Court’s ruling also means that if you are an “applicable large employer,” you have the option, as the dissenting Supreme Court Justices write in their opinion, to pay a tax for failing to offer your full-time employees (and their dependents) the opportunity to enroll in “minimum essential coverage” that is affordable.

You are an “applicable large employer,” beginning in 2014, if during the prior calendar year (2013), you employed an average of at least fifty (50) full-time employees. The Affordable Care Act sets forth the mechanism for calculating your employees (including full time equivalents (FTEs)) to determine whether you are an “applicable large employer.” If you decide that you are in fact an “applicable large employer” – you need to be ready to comply with the “employer shared responsibility” provisions of the Affordable Care Act in 2014 – or as the dissenting Justices again call the provision “an option subject to a tax.” It is an option because the federal government is not requiring “applicable large employers” to offer health insurance (that provides “minimum essential coverage” and is affordable) to their full-time employees, rather the federal government is giving them the option not to offer such health insurance but to pay a tax instead. Thus, the phrase “pay or play.”

Remember that the “pay or play” provisions or the “option subject to a tax” only applies to “applicable large employers” and their “full-time employees.” A “full-time employee” means “with respect to any month, an employee who is employed on average at least 30 hours of service per week.” So, if you have determined that you are an “applicable large employer” with “full-time employees” – you should hold on tight, because this is where the fun starts.

An “applicable large employer” will be liable for the “employer shared responsibility” payment if one the following occurs:

(a) The employer does not offer ANY health coverage or offers coverage to less than 95% of its “full-time employees” AND at least ONE of the full-time employees receives a premium tax credit to help pay for coverage through a Health Insurance Exchange.

OR

(b) The employer OFFERS health coverage to at least 95% of its full-time employees, but at least one full-time employee receives a premium tax credit to help pay for coverage on an Exchange, which may occur because the employer offer coverage to that employee OR because the coverage the employer offered to that employee was either unaffordable to the employee OR did not provide “minimum value.”

The proposed rule issued by the Internal Revenue Service (IRS) provides guidance as to how to determine whether the coverage that you offer as an “applicable large employer” is affordable or not. The rule also provides guidance as to whether the coverage provides “minimum value” to the employee.

The payment or the “tax option” is as follows:

(a) If the employer is subject to the “employer shared responsibility” provisions and DOES NOT offer coverage during the calendar year to at least 95% of its full-time employees, it owes a payment equal to the number of full-time employees the employer employed for the year (minus 30) multiplied by $2,000, as long as AT LEAST ONE FULL-TIME EMPLOYEE receives the premium tax credit through the Health Insurance Exchange; or

(b) If the employer is subject to the “employer shared responsibility” provisions and OFFERS coverage to AT LEAST 95% of its full-time employees, but has one of more full-time employees who receive a premium tax credit for the reasons state above, the employer is subject to a payment calculated based on the number of full-time employees who receive a premium tax credit for that month multiplied by 1/12 of $3,000. The amount of the payment for any calendar month is capped at the n umber of the employer’s full-time employees for the month (minus up to 30) multiplied by 1/12 of $3,000.

The penalty for offering unaffordable coverage should never exceed the penalty for not offering coverage at all.

IRS will come knocking….

If you owe the “employer shared responsibility” payment, the IRS will contact employer to inform them of a potential tax liability. Employers will have the opportunity to respond.

The proposed rule provides “applicable large employers” with certain tools to determine whether ongoing employees are full-time employees for purposes of determining and calculating any potential tax liability. The proposed rule utilizes the terms “look-back,” “administrative period,” and “stability period” to describe certain “safe harbor” provisions that can be used by the employer for compliance purposes.

On April 23, 2013, the IRS will conduct a public hearing on the proposed rules. Final rules will be issued after the public comment period. In the meantime, Large Employers may rely on the proposed rule for planning purposes . . . . so it is time to plan for 2014.