Prop. Regs. Clarify “Play or Pay” Rules of the Affordable Care Act

By Carlisle F. Toppin, J.D., LL.M., New York City

Editor: Kevin D. Anderson, CPA, J.D.

Employee Benefits

Early this year, the IRS issued proposed regulations (REG-138006-12) clarifying the “employer shared responsibility” provisions of Sec. 4980H, added to the Internal Revenue Code by the Patient Protection and Affordable Care Act, P.L. 111-148, as amended (informally known as the “play or pay” rules).


Beginning on Jan. 1, 2014, large employers that fail to offer minimum essential health care coverage at an affordable cost to substantially all of their full-time employees risk a penalty if one or more of those employees receive a federal subsidy of either a premium tax credit or cost-sharing reduction to purchase coverage for himself or herself through an insurance exchange (Sec. 4980H). This item parses the preceding sentence to briefly highlight key concepts in the proposed regulations.

Determining Large Employer Status

To be considered a large employer, an employer must have employed an average of at least 50 full-time employees (or an equivalent combination of full-time and part-time employees) during the preceding calendar year. Entities that are under common ownership or are otherwise related under Secs. 414(b), (c), (m), and (o) are treated as a single employer for purposes of determining whether they have 50 full-time employees. To determine if the threshold is met, the sum of all full-time employees and full-time equivalents (FTEs) for each calendar month in the preceding year is divided by 12. If the result is 50 or more, the employer is a large employer for the calendar year, unless a seasonal worker exception applies (Sec. 4980H(c)(2)).

Employees are determined under common law standards. Leased employees, sole proprietors, partners in a partnership, or 2% S corporation shareholders are not employees for this purpose (Prop. Regs. Sec. 54.4980H-1(a)(13)). Full-time status is assigned to employees who averaged at least 30 hours of service per week (or, if the employer elects, at least 130 hours of service per calendar month) (Prop. Regs. Sec. 54.4980H-1(a)(18)). For employees paid on an hourly basis, the employer must calculate their actual hours of service. For nonhourly employees, the employer must count their actual hours or apply an equivalency of eight hours daily or 40 hours weekly, provided the method used does not substantially understate the employees’ hours of service in a manner that would cause the employees not to be treated as full time (Prop. Regs. Sec. 54.4980H-3(b)).

FTEs are employees who averaged less than 30 hours of service per week individually, but, in combination, are counted as full-time employees solely for the purpose of determining whether an employer is a large employer. The number of FTE employees is determined by calculating the average number of monthly hours of service by all employees who worked less than full time (but capped at 120 hours for any single employee) and dividing by 120 (Prop. Regs. Sec. 54.4980H-2(c)).

Offering Coverage to Full-Time Employees and Dependents

To avoid the penalty, a large employer must offer minimum essential coverage as defined in Sec. 5000A(f) to its full-time employees (and their dependents, effective 2015). For this purpose, an employer may determine its full-time employees by looking back at a defined period of three to 12 consecutive calendar months chosen by the employer (a measurement period) to determine whether the employee performed on average at least 30 hours of service per week during that measurement period. If so, the employee would be treated as a full-time employee during a subsequent period (the stability period), regardless of the employee’s hours of service during the stability period. This “lookback measurement” method enables an employer to determine which employees must be offered health coverage during the stability period. The proposed regulations provide methods for determining the full-time status for various types of employees—existing, newly hired, seasonal, rehired, and those with a break in service or a change in employment status (Prop. Regs. Sec. 54.4980H-3).

The employer is treated as offering health care coverage to its full-time employees for a calendar month if, for that month, it offers such coverage to at least 95% of its full-time employees (and their dependents) (Prop. Regs. Sec. 54.4980H-4(a)). For this purpose, a dependent is defined as an employee’s child who is under 26 years old (but not a spouse) (Prop. Regs. Sec. 54.4980H-1(a)(11)).

Affordability and Federal Subsidy

An individual whose household income is between 100% and 400% of the federal poverty line ($23,550 to $94,200 for a family of four in 2013) will be eligible to receive a federal subsidy (through a refundable premium tax credit and a cost-sharing reduction) to purchase insurance on an exchange if, in relevant part, the only other alternative for obtaining minimum essential coverage is through an employer-sponsored plan that does not provide minimum value or is not affordable (Regs. Secs. 1.36B-2(a) and (c)(3)).

If the employer-sponsored plan fails to bear at least 60% of the total allowed costs of benefits provided under the plan, it is not providing minimum value, and an employee may be eligible to receive a federal subsidy (Prop. Regs. Sec. 54.4980H-1(a)(24), cross-referencing Sec. 36B(c)(2)(C)(ii)).

Where an employer-sponsored plan does provide minimum value, but the employee’s required contribution for the employer’s lowest-cost self-only coverage exceeds 9.5% of the employee’s household income, an employee may be eligible to receive a federal subsidy.

Recognizing the inability of employers to ascertain their employees’ total household incomes, the proposed regulations incorporate three safe harbors for determining affordability. The coverage is deemed affordable if the employee’s contribution does not exceed 9.5% of either (1) the employee’s Form W-2 (box 1) wages for the calendar year (prorated to reflect the period coverage is offered); (2) the monthly pay for salaried employees (or for hourly employees, an amount equal to 130 hours multiplied by the employee’s hourly rate of pay); or (3) a monthly amount determined as the federal poverty line for a single individual for the calendar year, divided by 12 (Prop. Regs. Sec. 54.4980H-5(e)).


A large employer risks a penalty under Sec. 4980H if one or more of its full-time employees receive a federal subsidy for purchasing individual coverage through an exchange.

Under Sec. 4980H(a), a large employer must either offer substantially all of its full-time employees (and their dependents) an opportunity to enroll in an employer-sponsored health plan providing minimum essential coverage or pay a penalty if at least one full-time employee receives a federal subsidy for purchasing health insurance through an exchange (the Sec. 4980H(a) penalty). The Sec. 4980H(a) penalty is equal to the product of $166.67 monthly ($2,000 annually) and the number of full-time employees (including employees who are offered coverage), less the first 30 full-time employees [$166.67 monthly × (number of full-time employees – 30)].

Under Sec. 4980H(b), a large employer that does offer minimum essential coverage to its full-time employees (and their dependents) may nevertheless be subject to a penalty if that coverage does not provide minimum value, is not affordable, or the employer offers coverage to at least 95% but less than 100% of its full-time employees and one or more of the full-time employees who are not offered coverage receive a federal subsidy (the Sec. 4980H(b) penalty). The Sec. 4980H(b) penalty is equal to the product of $250 monthly ($3,000 annually) and the number of full-time employees receiving a subsidy. The Sec. 4980H(b) penalty cannot exceed the amount of the penalty that would have applied under Sec. 4980H(a) if the employer had failed to offer coverage to its employees (Sec. 4980H(b)(2)).

Action Items

Notwithstanding the 2014 effective date of the “play or pay” provisions, actions taken in 2013 can reduce or eliminate penalty exposure next year. Among the many action items, employers should develop systems to track the hours of part-time employees, determine the number of full-time employees (and equivalents) each month, identify other employers whose employees must be combined in the employee count, assess the affordability of their plan, and establish “lookback measurement” and “stability” periods to identify full-time employees to whom coverage should be offered.


Kevin Anderson is a partner, National Tax Services, with BDO USA LLP, in Bethesda, Md.

For additional information about these items, contact Mr. Anderson at 301-634-0222 or

Unless otherwise noted, contributors are members of or associated with BDO USA LLP.

Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.