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Hospitality Businesses Should Consider “Play and Pay” for the ACA

by Paul Palkovic

A hospitality industry professional recently asked me if I thought most hotels would stop offering group health insurance coverage to their employees and have them purchase their own policies from Covered California.  My answer: Absolutely not.

When it comes to working within the Affordable Care Act (ACA) there are generally two options discussed.  The “Pay” option, is when an employer with over 100 full-time employees now and over 50 in 2016 (those working greater than 30 hours per week) chooses to pay the fines associated with failing to offer ACA compliant group health insurance coverage to all their full -time employees. Contrast that with the “Play” option, whereby an employer offers ACA compliant insurance that meets the requirements for minimum value coverage and affordability (employee contribution of no more than 9.5% of annual income) to all full-time employees.

A third approach might be called “Play and Pay.” Though this approach is certainly not a viable option for every hotel, it is a more creative approach to offering health insurance coverage to an employee population that is largely driven by each employer’s budget, unique demographic and employee income situation. The employer offers ACA compliant coverage to some employees while not offering it to others and absorbing any resultant fines.  The current lack of nondiscrimination rules makes the Pay and Play option viable – at least for now. 

A good example would be to imagine a hotel with 200 employees that currently offers ACA compliant coverage to 80 key employees. The hotel’s monthly per-employee premium is roughly $416, making its annual cost $400,000. After careful counting of hours worked, the hotel determines that another 80 of its 120 variable hour employees are considered full-time for ACA coverage. The employer is not required to offer coverage to the 40 employees who work less than 30 hours per-week.  If the hotel took the “Pay” option and terminated its current company sponsored insurance program, its penalties would add up to $160,000 for 2015. The hotel would also need to compensate its 80 key employees for lost health coverage. Hence, the employer would likely continue to incur an amount close to the $400,000 annual premium it is are now in addition to a $56,000 business tax adjustment, as the payout would not be a tax deductible expense like the premium. The gross total cost of the ”Pay” option for this hotel would be roughly $616,000. On the other hand, the total cost of the “Play” option-- offering the current coverage to all 160 eligible employees--would be roughly $800,000. 

The Pay and Play option would dictate this hotel owner or operator take a different approach. For example, the 2015 rules require that an employer offer coverage to 70% of eligible employees, so in this case 14 full-time employees. The business could continue paying $400,000 for the 80 employees as it has in the past and also offer 40 employees who work between 35 and 40 hours an ACA compliant high deductible plan, and ask them to pay $90 a month towards an employee contribution. Some of these employees would have coverage from elsewhere, buy coverage on their own, or they could see the $90 as being too expensive, and choose to go bare and pay the IRS penalty. In any event, the participation level for these 40 employees would likely be low – probably no more than 30% (or 12 employees) which would equate to roughly $23,000 in employer paid premiums. The remaining 40 employees who work between 30 and 35 hours per week would not be offered coverage.  This would trigger a penalty if any of those employees chose to go to Covered California and receive a subsidy. However, many of these employees will be eligible for Medi-Cal, have other coverage, or choose to pay the IRS fine which all are contributing to limit the amount of the employer’s penalty.  The total cost in fines would likely be around $30,000. The total cost of the Play and Pay approach would be $453,000 as compared to a gross cost of $616,000 if the hotel chose to terminate its program. The Pay and Play approach would allow the employer to perpetuate the benefits it had offered to its original 80 employees, expanding benefits to another 40 employees for only a nominal cost, and enhance employee attraction and retention.  

As we move through the full implementation of the ACA, it’s advisable for health insurance buyers to begin their renewal process early, at least four to five months out. It’s also advisable to stay engaged with a creative and pro-active broker that knows the rules, stays on top of current changes and has a strong ACA compliance specialist on their staff.

Paul Palkovic, ARM, CPCU
Bolton & Company
Insurance Brokers and Employee Benefits Consultants

This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.