Certain businesses will need to increase their contribution to employee health insurance in 2023 or face fines of up to $4,320 per year per employee. Under the Affordable care Act (ACA) certain employers must either 1) offer health coverage that is “affordable” to their full-time employees, or 2) make a “responsibility payment” to the IRS. In the healthcare industry, this requirement is commonly termed Pay or Play, and these responsibility payments called Pay or Play penalties. Let’s look at what changed for 2023, to what businesses the Pay or Play requirements apply, and what to do about it. As with most government regulations, there are caveats, exclusions, and caveats to the exclusions…all of which are not possible to address in this review. Thus, be certain to engage your insurance broker with any questions.
Pay or Play Applicability
These new rules apply to opens in a new windowapplicable large employers (ALEs). Whether a business is an ALE depends upon how many staff they employ. Generally, a business is an ALE if it employees fifty or more full time employees, including full time equivalents. Many businesses are not ALEs, but for those that are, the new 2023 employer contributions must be considered.
The ACA requires ALEs to offer “affordable” health coverage or be penalized. The penalty can be triggered if even a single full-time employee qualifies for a subsidy for Exchange coverage, indicating affordable health coverage was not otherwise available to them. Specifically, in 2023 a health plan is deemed affordable if it costs 9.12% or less of an employee’s household income. This is a change from 2022 where the trigger is 9.61%. Although this may not sound like much, it is the largest percentage change and the highest Pay or Play employer contribution requirement ever.
However, since businesses cannot know the household income of each of their employees, the IRS provides the following safe harbors based upon data they do possess. If an employee’s contribution is 9.12% or less based upon one of these safe harbors, the business will not be penalized.
- Form W-2 wages: based on wages indicated in Box 1 of an employee’s Form W-2
- Employee’s rate of pay: based at the beginning of the coverage period
- Federal poverty line: based on the federal poverty line, calculated monthly
An ALE does not need to choose only one safe harbor, but may use multiple if they offer 95% of their full-time employees and dependents the opportunity to enroll in coverage. For more information on how to calculate and apply these safe harbors, reference the opens in a new windowIRS’s FAQ page and the section titled opens in a new windowAffordability and Minimum Value, or contact your Bankers Insurance broker.
Pay or Play penalties can be significant. Businesses should first determine whether they are an ALE or may become one prior to 2023. If so, they should utilize one of the safe harbors to determine whether their contribution to their health insurance plan is enough to avoid a Pay or Play penalty. If an increase in employer contribution is needed, they can then weigh the benefits and costs to make an informed decision.
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