1. HUMAN CAPITAL PRACTICE
ALERT:
HEALTH CARE REFORM BILL
February 2013 www.willis.com
EMPLOYER PAY OR PLAY EXCISE
TAXES – WHERE ARE WE NOW?
Starting in 2014, large employers may incur the so-called “pay or play” excise tax unless they
meet certain standards for offering health coverage to their full-time employees. An employer
can control its exposure to the pay or play excise tax, but doing so generally requires measuring
the employer’s workforce and individual workers’ hours in various ways, as well as evaluating any
health coverage the employer offers against certain benchmarks. Recent proposed regulations
under the pay or play provisions (along with a related set of questions and answers) provide
important details on the measurements and evaluations that determine whether an employer
might incur the excise tax.
The rules governing the pay or play excise tax are complex. Even determining which employees
are considered full-time calls for detailed analysis. For larger employers with multiple plans and
employment arrangements, it is difficult to overstate how complex applying the pay or play rules
can become. For most employers, administering plans to avoid the pay or play excise tax will be
manageable, but the employer first needs to determine which of the many options for applying
the rules are most advantageous.
Willis’ National Legal & Research Group has prepared a comprehensive guide regarding the pay
or play excise tax for its clients. The guide explains our current understanding of how the pay or
play excise tax works and the options for applying the pay or play rules that employers might find
most advantageous. We provide a high-level summary of the guide here. Willis clients may access
the guide –“Health Care Reform: Employer Pay or Play Excise Taxes Employer Guide” – on
Willis Essentials (log-in credentials required) or may request a copy from their Willis Human
Capital Practice representative.
PAY OR PLAY BASICS
Despite the “pay or play” shorthand reference, these provisions are best thought of as including
two separate excise tax provisions. One excise tax (we call it the “cliff”) usually will be very large
if it applies, but it is readily avoidable. The other (which we call the “drop-off”) usually will be
small by comparison, but it is more difficult to avoid completely. These excise taxes apply only to
large employers (50 or more full-time employees (or equivalents) in the last calendar year). Also,
neither the cliff nor the drop-off applies unless the employer receives a certification that at least
one of its full-time employees has obtained coverage through an insurance exchange and has
qualified to receive premium assistance or cost-sharing reduction with respect to that coverage.
Very generally, full-time employees are those employed for an average of at least 30 hours of
service per week.

2. n The cliff may apply if an employer fails to offer minimum
essential coverage (which includes almost any employer-
ANALYZING AN EMPLOYER’S
sponsored medical benefits, regardless of cost or value) to OPTIONS UNDER THE PAY OR
substantially all of its full-time employees and their dependents.
The cliff excise tax is $2,000 annually – $166.67 per month – for
PLAY PROVISIONS
every one of an employer’s full-time employees, (depending on The pay or play excise taxes require many
corporate structure, up to 30 of the employer’s full-time employers that cannot avoid the taxes to
employees are disregarded). evaluate trade-offs between cost and
administrative complexity. To complicate
n If an employer avoids the cliff, it may still incur the drop-off if it matters, the trade-offs are not the same for all
does not offer each full-time employee minimum essential employers, varying based on the size and
coverage that is both minimum value (at least 60% actuarial characteristics of the employer’s workforce, as
value) and affordable (no more than 9.5% of the individual well as available coverage options.
federal poverty level or the employee’s household income, W-2
pay or rate of pay). The drop-off excise tax is $3,000 annually –
ONLY “LARGE EMPLOYERS” MAY
$250 per month – for each full-time employee for whom the
employer receives a certification of premium assistance or cost-
INCUR THE PAY OR PLAY EXCISE TAX
An employer is not subject to any pay or play
sharing reduction, unless the cliff would be a lower amount.
excise tax, regardless of what coverage it does
(or does not) offer, unless the employer
The applicability and calculation of these excise taxes are explained
(including certain affiliated companies) is a
in our employer guide to the pay or play excise tax (see information
large employer (50 or more full-time
on obtaining a copy above).
employees [or equivalents] during the last
calendar year). Because part-time employees
PAY OR PLAY EFFECTIVE DATE essentially count as fractions when making
the large employer determination, a company
The pay or play provisions generally are effective for all employers that has only a few employees working 30 or
and plans on January 1, 2014, regardless of plan year, so a large more hours per week may be a large employer.
employer may incur an excise tax for January 2014 and later months There is no exemption from the pay or play
if coverage meeting the applicable standards is not offered for those provisions for tax-exempt, charitable,
months. An employer that wishes to determine whether it is a large religious or governmental organizations – all
employer for 2014 or to identify its full-time employees using the may be large employers.
look-back measurement method (as described below) must track
employees’ hours of service during 2013 in order to implement on For many employers, it will be apparent that
January 1, 2014. (A complex transition rule may allow some non- they had 50 or more full-time employees
calendar year plans to delay compliance until the beginning of their during the last calendar year. Other
2014 plan year, but we do not recommend that employers rely on that employers may choose to presume that they
rule without obtaining a legal opinion on its applicability.)
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3. are large employers or may count their employees’ hours of service during the previous
calendar year to make the determination as explained in our employer guide to the pay or
play excise tax (see information on obtaining a copy above). Under a transition rule, the
determination of whether a company is a large employer for 2014 may be made based on any
period of at least six consecutive calendar months during 2013.
OFFERING ALL EMPLOYEES MINIMUM ESSENTIAL COVERAGE THAT IS
AFFORDABLE AND MINIMUM VALUE ALWAYS WORKS
An employer will incur neither the cliff nor the drop-off if it offers all of its full-time
employees minimum essential coverage that includes dependent coverage and, with respect
to the employees’ coverage only, the minimum essential coverage is both affordable and
minimum value. To limit such coverage to full-time employees, an employer must identify
those full-time employees, which may involve significant administrative difficulties (see
discussion below). For most employers, identifying full-time employees will be the most
difficult task in connection with the pay or play provisions.
An employer could avoid those difficulties, yet still foreclose the possibility of incurring a
pay or play penalty, if it offered minimum essential coverage that is both affordable and
minimum value to all of its employees regardless of hours worked or full-time, part-time,
seasonal, temporary or other status and offered minimum essential coverage to dependents.
This approach may be more practical than many would anticipate, because it appears that
minimum essential coverage that just meets the affordability and minimum value standards
is less costly than most employer plans are currently. This “all in” approach is the only way
we have identified to avoid the difficulties of identifying full-time employees while ensuring
that the pay or play excise tax will not apply.
As with many terms and phrases used in the pay or play provisions, full understanding of the
phrase “offering full-time employees minimum essential coverage that is both affordable
and minimum value” requires extensive explanation of detailed rules. Those rules are
explained in our employer guide to the pay or play excise tax (see information on obtaining a
copy above).
OFFERING COVERAGE TO FULL-TIME EMPLOYEES IS SUFFICIENT BUT MAY
BE DIFFICULT
Only full-time employees’ coverage is considered when determining whether an employer
has incurred a pay or play excise tax. While part-time employees may be excluded, an
employer that wishes to exclude any of its employees (including part-time, seasonal,
temporary, etc.) from coverage will need to be able to identify and document the excluded
employees’ part-time status in order to manage its exposure to the pay or play excise taxes.
For each employee to whom the employer does not offer coverage, the reason should be
documented.
IDENTIFYING FULL-TIME EMPLOYEES
A full-time employee generally is one who has an average of at least 30 hours of service per
week during a calendar month. The determination of hours of service and full-time or part-
time status is made on an employee-by-employee basis, generally using actual hours of
service. An employer’s classification of an individual employee as full-time, part-time,
seasonal, temporary, etc., has almost no influence on whether the employee is a full-time
employee for purposes of the pay or play excise tax. Because any employee may be a full-time
employee based solely on hours of service, all employees’ hours of service must be measured
3 Willis North America • 2/13

4. to reliably identify all of an employer’s full-time employees. The
rules regarding the hours of service that must be counted and the
definition of full-time employee are explained in our employer guide
to the pay or play excise tax (see information on obtaining a copy
above).
MOST EMPLOYERS WILL USE THE LOOK-BACK MEASUREMENT METHOD
Most employers will need to use the look-back measurement method
for identifying full-time employees (a less difficult measurement
method may work for employers with very simple situations). Very
generally, this method calls for an employer to measure each
employee’s average hours of service over a look-back measurement
period that is between three and 12 months long, assign each
employee full-time or part-time status based on that measurement,
and continue that status throughout a period that follows the
measurement period and is usually the same length (a stability
period). Between the measurement period and the stability period,
an employer may have an administration period of up to 90 days.
Otherwise, the stability period must start immediately after the
measurement period.
EMPLOYER CHOICES WHEN USING THE LOOK-BACK MEASUREMENT METHOD
Under the look-back measurement method, the employer chooses
the length of the measurement, administration and stability periods,
as well as the dates on which these periods begin and end, subject to a
number of restrictions. There are separate rules for applying the
look-back measurement method to ongoing employees and to new
employees, and an employer must use this method with respect to
ongoing employees in order to be able to use it for new employees.
Both sets of rules contain a daunting number of special rules,
exceptions and options. There are also restrictions on changes to the
measurement, administration and stability periods. For example, an
employer may not change a measurement period nor its associated
stability period once the measurement period has started.
The best way to explain the look-back measurement method for both
new employees and ongoing employees is by providing examples of
its operation. In our employer guide to the pay or play excise tax (see
information on obtaining a copy above), we provide multiple
examples, illustrating various permutations of the look-back
measurement method as it applies to both new and ongoing
employees, as well as the many options and special rules that apply
when using the look-back measurement method. The guide also
explains a transition rule allowing an employer to delay the start of
its first look-back measurement period without shortening the
associated stability period, so long as the measurement period lasts
at least six months and begins no later than July 1, 2013.
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5. Applying the Look-Back Measurement Method to New Employees May be Tricky STEP BACK FROM THE CLIFF
When an employer can use the look-back measurement method for a Most employers have concluded that simply
new employee, coverage for that employee may be delayed for more offering no coverage (i.e., incurring the cliff )
than 13 months while the employer measures the employee’s hours of is not viable because the cliff penalty is so
service, determines full-time or part-time status and offers coverage steep and the cost of offering minimum
as appropriate. This delay will not result in a pay or play excise tax (or essential coverage that prevents it is so
violate the 90-day limit on waiting periods that is effective for plan minimal. Even an employer that prefers to
years starting on or after January 1, 2014) if it is applied to a variable- offer no coverage should strongly consider
hour employee or a seasonal employee. For other employees – those offering minimum essential coverage, with
who are reasonably expected to work at least 30 hours per week on NO employer contributions, to all of its
average – coverage must be offered in a manner that complies with employees and their dependents just to keep
the 90-day limit on waiting periods. This means that identifying an open the possibility of minimizing the pay or
individual as a variable-hour or seasonal employee usually causes a play excise tax. This “failsafe” option is
significant delay in health coverage becoming effective. As a result, explained in our employer guide to the pay or
whenever an employer elects to treat an individual as a variable-hour play excise tax (see information on obtaining
employee or seasonal employee, a best practice is documenting the a copy above).
circumstances that led to that conclusion. The circumstances in
which a new employee may be treated as variable-hour or seasonal BE CAREFUL ABOUT THE DROP-OFF
are explained in our employer guide to the pay or play excise tax (see Employers offering minimum essential
information on obtaining a copy above). coverage may still incur the drop-off, and
most employers are planning to offer
OFFERING DIFFERENT COVERAGE TO DIFFERENT GROUPS OF FULL- coverage that prevents both the cliff and the
TIME EMPLOYEES drop-off from applying. As they work with the
Employers that must expand the group of employees eligible for various pay or play definitions and concepts,
coverage in order to avoid the pay or play excise taxes may find that however, some employers are finding that it
they wish to offer different levels of coverage or contributions to may make sense financially to risk incurring
different groups of employees. Nothing in the pay or play provisions the drop-off with respect to some employees
requires that similar levels of coverage or contributions be offered to (e.g., by offering minimum essential coverage
all full-time employees. Employers that have self-insured plans are that meets the standards, except that it is not
subject to nondiscrimination rules, however, and those rules may affordable for some lower-paid employees).
affect an employer’s ability to implement these types of An employer might encounter this situation if
arrangements. (Similar rules will become effective for insured health it wished to maintain uniform employee
plans after the relevant agencies issue implementing regulations.) contributions across its workforce but found
Cafeteria plan nondiscrimination testing also may be affected if that the cost of making the coverage available
required contributions for health coverage are paid on a pre-tax basis. to every full-time employee at the cost that is
affordable for its lowest-paid full-time
PLAYING AND PAYING employee is prohibitive. An employer in this
situation might choose higher required
Offering coverage to employees still paying the pay or play excise tax employee contributions, so the coverage
may sound like the worst of all possible results, but many are offered would not be affordable for some of
concluding that doing so makes sense financially. Various options for the employer’s lower-paid employees. In that
offering coverage and their effect on the pay or play excise tax case, the employer may incur the drop-off
calculation are explained in our employer guide to the pay or play penalty ($250 per calendar month for each
excise tax (see information on obtaining a copy above). full-time employee for whom the employer
receives a certification of assistance) with
respect to employees for whom the coverage
is not affordable.
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6. BALANCING AFFORDABILITY AND MINIMUM VALUE
Affordability is determined on an individual basis. Just because coverage is not affordable
for one full-time employee does not mean that it is unaffordable for all full-time employees.
Minimum value is different. The actuarial value of coverage is the same for all individuals
who are offered that coverage.
This means that an employer offering coverage that does not provide minimum value may
incur the drop-off penalty with respect to every one of its full-time employees for which it
receives a certification of assistance, even if the cost of that coverage is very low. Therefore,
when considering trade-offs between the value of the coverage offered and the cost of that
coverage, an employer will generally minimize its chances of incurring the drop-off if it leans
toward higher premiums rather than lower value. At the same time, employers purchasing
insurance coverage may find that participation and contribution requirements imposed by
carriers put them in the position of offering minimum essential coverage that does not
provide minimum value, but doing so at very low cost to employees. Employers in this
situation may still benefit from offering minimum essential coverage that has low actuarial
value because they will not incur a pay or play excise tax with respect to employees who
accept and pay for coverage. The very low cost of minimum essential coverage that has low
actuarial value may make it appealing to many of an employer’s lowest-paid employees, and
those that accept the coverage will be ineligible for premium tax credits or cost-sharing
reductions. That, in turn, will prevent the employer from incurring the drop-off with respect
to those employees.
The options available to employers and the trade-offs implicit in each are explained in our
employer guide to the pay or play excise tax (see information on obtaining a copy above).
WHAT COMES NEXT?
While the new proposed regulations are a giant step forward in understanding exactly what
employers must do to avoid the pay or play penalty, the preamble to the regulations
identified a number of items to be addressed in future guidance. Those include –
n Defining seasonal employees for purposes of the look-back measurement method
n Certain special issues in applying the rules to particular employers, such as churches,
governmental entities and temporary staffing organizations, among others
n Additional rules on counting hours of service when employees have certain types of
unpaid absences from employment
As always, Willis’ National Legal & Research Group will monitor developments and provide
information as they occur.
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7. KEY CONTACTS
U.S. HUMAN CAPITAL PRACTICE OFFICE LOCATIONS
NEW ENGLAND ATLANTIC Marietta, GA
770 425 6700
Auburn, ME Baltimore, MD
207 783 2211 410 584 7528 Miami, FL
305 421 6208
Bangor, ME Knoxville, TN
207 942 4671 865 588 8101 Mobile, AL
251 544 0212
Boston, MA Memphis, TN
617 437 6900 901 248 3103 Orlando, FL
407 562 2493
Burlington, VT Metro DC
802 264 9536 301 581 4262 Raleigh, NC
704 344 4856
Hartford, CT Nashville, TN
860 756 7365 615 872 3716 Savannah, GA
912 239 9047
Manchester, NH Norfolk, VA
603 627 9583 757 628 2303 Tallahassee, FL
850 385 3636
Portland, ME Reston, VA
207 553 2131 703 435 7078 Tampa, FL
813 490 6808
Shelton, CT Richmond, VA 813 289 7996
203 924 2994 804 527 2343
Vero Beach, FL
NORTHEAST Rockville, MD 772 469 2842
301 692 3025
Buffalo, NY MIDWEST
716 856 1100 SOUTHEAST
Appleton, WI
Morristown, NJ Atlanta, GA 800 236 3311
973 539 1923 404 224 5000
Chicago, IL
Mt. Laurel, NJ Birmingham, AL 312 288 7700
856 914 4600 205 871 3300 312 348 7700
New York, NY Charlotte, NC Cleveland, OH
212 915 8802 704 344 4856 216 861 9100
Norwalk, CT Gainesville, FL Columbus, OH
203 523 0501 352 378 2511 614 326 4722
Radnor, PA Greenville, SC Detroit, MI
610 254 7289 704 344 4856 248 539 6600
Wilmington, DE Jacksonville, FL Grand Rapids, MI
302 397 0171 904 562 5552 616 957 2020
Willis North America • 02/13

8. Milwaukee, WI WESTERN
262 780 3476
Fresno, CA
Minneapolis, MN 559 256 6212
763 302 7131
763 302 7209 Irvine, CA
949 885 1200
Moline, IL
309 764 9666 Las Vegas, NV
602 787 6235
Pittsburgh, PA 602 787 6078
412 645 8506
Los Angeles, CA
Schaumburg, IL 213 607 6300
847 517 3469
Phoenix, AZ
SOUTH CENTRAL 602 787 6235
602 787 6078
Amarillo, TX
806 376 4761 Portland, OR
503 274 6224
Austin, TX
512 651 1660 Rancho/Irvine, CA
562 435 2259
Dallas, TX
972 715 2194 San Diego, CA
972 715 6272 858 678 2000
858 678 2132
Denver, CO
303 765 1564 San Francisco, CA
303 773 1373 415 291 1567
Houston, TX San Jose, CA
713 625 1017 408 436 7000
713 625 1082
Seattle, WA
McAllen, TX 800 456 1415
956 682 9423
Mills, WY The information contained in this publication is
307 266 6568 not intended to represent legal or tax advice and
has been prepared solely for educational
purposes. You may wish to consult your attorney
New Orleans, LA or tax adviser regarding issues raised in this
504 581 6151 publication.
Oklahoma City, OK
405 232 0651
Overland Park, KS
913 339 0800
San Antonio, TX
210 979 7470
Wichita, KS
316 263 3211
Willis North America • 02/13