Employer Services Advisory
August 22, 2012


Looking Ahead: The Pay or Play Mandate for Large Employers



For additional information, please contact:

Ann Murray

Sam Choy

Karl Rand

Stacey Stewart

Ellen Schiller

Lorie Hutchins


This is part of our series of alerts intended to help guide plan sponsors through their new obligations under the health care reform laws and related guidance.

A major emphasis of health care reform is reducing the number of uninsured individuals, and the employer “pay or play” mandate is one of several new laws aimed at expanding coverage. Although this new law does not require you, as an employer, to provide health coverage to your employees, beginning in January, 2014, if you are a large employer you must choose to:




offer minimum essential coverage to all of your full-time employees



pay an excise tax if you do not offer minimum essential coverage (or any coverage) and at least one of your full-time employees is certified as having enrolled in coverage through a state health exchange for which he or she received a premium tax credit or cost sharing reduction

The “pay or play” mandate applies to you for a calendar month if you employed an average of at least 50 full-time equivalent employees (FTEs) on business days in the prior calendar year (or if you are a new employer, are reasonably expected to employ an average of 50 full-time employees on business days in the current calendar year). Your total FTEs is determined by counting all full-time employees working at least 30 hours a week PLUS the number created by dividing the total hours worked by all of your part-time employees by 120. In certain cases, you can exclude seasonal employees if you exceeded 50 employees on 120 days or fewer in the calendar year due to seasonal employees. 

In determining FTEs, it is currently unclear whether you will be allowed to consider only employees who are U.S. citizens or nationals or aliens lawfully in the U.S., or whether you must count a larger portion (or all) of your worldwide employees (for example, temporary visas and expatriate employees). Until guidance is issued, you should not assume that you can ignore non-U.S. citizen employees working in the U.S. or those working outside the U.S.

The same aggregation rules that apply to qualified retirement plans (namely, Section 414 of the Internal Revenue Code) apply to the “pay or play” mandate. So, in determining FTEs, you need to include:

1. any other company that is part of the same controlled group or affiliated service group. This is different than the normal health and welfare aggregation rules, which are generally believed not to count affiliated service groups (this has been an area of some uncertainty for years). Affiliated service groups can be created when the primary business of the first entity is managing the second entity or when the primary business of first entity is performing services for the second entity and the first entity or its officers own a certain portion of the second entity.

2. certain workers who are “leased employees.” If you are a party to an employee leasing arrangement, you may need to count a leased employee once he or she has worked for you on a substantially full-time basis for 12 months. A leased employee may exist under a variety of different arrangements, including professional employer organizations (PEOs), employee leasing companies, management services agreements and shared services agreements. 

In certain situations, you may also need to include employees of predecessor employers.

Many open issues remain in determining whether you are an applicable large employer, and the IRS has issued a request for comments on questions such as whether to count hours of paid or unpaid time off, how to treat new employees, how to calculate hours of service for non-hourly employees, and how to address fluctuations in hours worked, including use of a look-back measurement/stability period safe harbor (see IRS Notice 2011-36 here). While this IRS document is interesting reading and provides some insight into possible interpretations the IRS may adopt, the IRS has clearly stated that it is not guidance and that it will issue official guidance only after it considers all comments.

To learn more about the "pay or play" mandate and what you need to do to comply, read the full advisory here.

With a team of attorneys who are highly experienced in the employee benefits field, MLA can provide answers to questions and assistance in complying with these requirements.


McKenna Long & Aldridge LLP
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