- - Saturday, February 16, 2013

With the employer mandate (informally, the “play or pay” provision) of Obamacare now less than a year away, some employers are undoubtedly contemplating whether or not to “play or pay.” 

One cannot help but ponder the infinite possibilities that attorneys and consultants are exploring right now in order to advise clients on just how to dodge Obamacare. In fact, the IRS just released a Q&A document that specifically addresses the play or pay provision, as well as a regulatory proposal that has been characterized by some as a warning to companies not to attempt to evade the play or pay requirement.

Ours is an employment-based, third party payor system. It has been since WWII-era wage increase caps gave rise to health care coverage as a benefit of employment. Health care coverage now has an employment connotation attached to it, which has evolved, at least to some extent, into an expectation — perhaps rightly so, if wages have been offset against the cost of providing coverage. Yet even as health care has evolved to an employment-based, third party benefit and costs have gone up, certain types of jobs still are not traditionally associated with such benefits, which means there are not widely held expectations of employees receiving them. 

Undoubtedly, some employers will go to extremes to dodge Obamacare. In certain circumstances, given today’s demanding environment, practically speaking this track may be understandable if only from a motive perspective.

For borderline companies that teeter on the verge of being labeled a “large employer” for purposes of the play or pay requirement, the increase in productivity brought about by one additional employee will not likely offset the cost of coverage, with descending applicability for each additional employee thereafter. Small businesses that don’t offer coverage today may very well choose to cap growth.

Unfortunately, many employers who employ more than 50 full-time employees may even consider downsizing. The magic +x that sways the balance of productivity in comparison to the additional cost of providing health care benefits will be subject to a case-by-case review, and of course there could be additional tax implications that impact the final decision. 

An interesting twist on this “large employer” avoidance angle is brought to light by the IRS’s Q&A document. According to the IRS, “For purposes of determining whether an employer meets the 50 full-time employee (or full-time employees and full-time employee equivalents) threshold, an employer generally will take into account only work performed in the United States.” Does this mean Obamacare may actually give incentive to additional outsourcing as a successful means of avoiding the play or pay requirement?

Some employers are banking on an interpretation that employees who work fewer than 30 hours per week are not considered full-time employees. Papa John’s pizza CEO John Schnatter made headlines last fall when he announced that he was toying with the option of reducing employees’ hours in order to avoid the requirement to provide health care coverage for them. The Darden group (which operates several chain restaurantsincluding Red Lobster, The Olive Garden and Longhorn Steakhouses) hinted at a similar such reduction in hours but backed off from this approach, at least for the time being, in response to public outcry.

Obamacare imposes a penalty on employers who utilize an extended waiting period for benefits to commence for full-time employees. Obamacare defers to Section 2701(b)(4) of the Public Health Service Act for the definition of an extended waiting period beyond 30 days, but sets the cap at 90 days. With health care premiums now averaging more than $10,000 per year for each employee, some crafty minds will undoubtedly figure out how to maximize use of this “penalty” to save companies money. This approach doesn’t necessarily involve dodging the play or pay provision entirely, but minimizes expenses by paying a penalty instead of commencing with coverage on a new employee’s first day. Multiplied by numerous
employees, the difference can certainly add up. 

What about other benefits? And salaries? What will the long-term impact of Obamacare be on overall compensation? While the IRS has directly addressed using staffing agencies to avoid the play or pay requirement, questions undoubtedly remain with respect to other strategies, such as the use of seasonal workers.

The IRS has indicated that anti-abuse rules will be implemented to curtail the use of Obamacare loopholes to dodge the play or pay requirement. Yet as some have already questioned, can the IRS legitimately utilize rule-making to modify core components of a federal act? Or will this rule-based clean-up effort simply spawn more lengthy litigation?

Only one thing is certain: Some employers will resort to extreme measures to avoid the play or pay requirement — and 2013 will be a very interesting year in health care.

Jason Miller is a health law attorney who writes extensively about health care issues.

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