Proposed Regulations on Employer Pay-or-Play Provisions

January 2, 2013

On Friday afternoon, December 28, the IRS issued proposed regulations interpreting the employer pay-or-play provisions (also known as the employer shared responsibility provisions) of the federal health care reform law. The IRS also posted on its website a series of questions and answers regarding the pay-or-play provisions. Employers have anxiously awaited this additional guidance on the pay-or-play provisions since last August’s safe harbor guidance on identifying full-time employees made clear that employers have substantial work to do during 2013 if they are going to be ready for the pay-or-play provisions’ 2014 effective date (see Willis Human Capital Practice Alert, October 2012, “PPACA Determination of Full-Time Employees – Interim Safe Harbor”).

Willis’ National Legal & Research Group is reviewing the new proposed regulations and will provide detailed analysis in a future publication.


Starting in 2014, large employers – those with 50 or more full-time employees (counting part-time employees as fractions) – may incur a penalty tax unless they meet standards for offering health coverage to individuals who are full-time employees. Specifically, no employer will incur the penalty tax if it offers individuals who are its full-time employees and those employees’ dependents “minimum essential coverage” and, with respect to the full-time employees, the coverage is both affordable and sufficiently valuable. Large employers that are not able to offer coverage that is affordable and sufficiently valuable so that they avoid the penalty tax altogether, are strongly urged to offer less affordable or less valuable minimum essential coverage to full-time employees and their dependents. Failing to do so may result in a very high penalty tax. At the same time, offering minimum essential coverage should have minimal cost because minimum essential coverage is virtually any medical coverage an employer provides to its employees that does not consist of excepted benefits, even if the employer makes no contribution toward the cost of that coverage. (See Willis Human Capital Practice Alert, July 2011, “Looking Ahead – Compliance After 2011″ for an explanation of affordable and sufficiently valuable coverage, excepted benefits, and minimum essential coverage.)

For purposes of applying the pay-or-play provisions, employees who work 30 or more hours per week on average are considered to be full-time employees. For details of previous IRS guidance on making this determination see Willis Human Capital Practice Alert, October 2012, “PPACA Determination of Full-Time Employees – Interim Safe Harbor.” Employers may rely on that previous guidance through the end of 2014 and the new proposed regulations do not change that.

Proposed Regulations and FAQs

Like all proposed regulations, the newly issued rules are subject to change. In the preamble to the new rules, the IRS solicited comments on many topics, apparently anticipating that changes will be needed. The IRS also stated, however, that employers may rely on the proposed regulations pending final regulations or other guidance and that any future guidance that is more restrictive than the proposed regulations will not be retroactively effective and will allow employers “sufficient time” to comply. The ability to rely on the proposed regulations will be important to many employers because there are several different transition rules that ease compliance for 2014 and it is unlikely that the rules will be finalized before mid-2013 at the earliest.

While detailed analysis will be provided in a later Willis publication, here are some highlights from an initial reading:

When determining whether an employer is an applicable large employer that is subject to the pay-or-play provisions (i.e., whether the employer has 50 or more full-time employees (counting part-time employees as fractions), all employees of all entities included in a controlled group of companies are counted. When determining whether a pay-or-play penalty has been incurred, however, the employees of each entity within the controlled group are considered separately.

The requirement to make minimum essential coverage available to full-time employees and their dependents includes a 5% margin of error. That is, employers will be deemed to have met the requirement if minimum essential coverage is offered to 95% of individuals who are full-time employees and those employees’ dependents. In addition, for 2014, minimum essential coverage need only be extended to full-time employees (not to dependents) in order to meet the minimum essential coverage standard. When minimum essential coverage must be offered for dependents in 2015, only children – not spouses – of full-time employees must be included in the offer.

Among the transition rules is one that allows for employers that maintain non-calendar-year plans to avoid the pay-or-play penalty with respect to certain employees during certain periods before the beginning of their 2014 plan year.

The proposed regulations address certain situations in which employees are absent from work without pay, explaining the effect of these periods on the determination of whether such employees are full-time employees for purposes of the pay-or-play provisions. Similarly, the proposed regulations address the effect of periods when an employee works outside the U.S.

The FAQs provide an overview of how the pay-or-play penalty will be assessed and collected, noting that employers will have an opportunity to respond to any potential assessment before any liability is assessed or payment demanded and that employers will not be required to include the pay-or-play penalty on any federal tax return that they file.

Disclaimer: The information provided on this webpage is for informational purposes only. It is not and is not intended to be tax or legal advice. Consult with your own tax advisor and/or attorney.