Federal service contractors who also are subject to the Affordable Care Act have an unusual problem coming up.  As part of their contract duties, they promise to pay their contract employees at least the compensation set in an Area Wage Determination (“AWD”) issued by the Department of Labor.  The AWD specifies the prevailing hourly wage and, separately, the prevailing value of benefits.  The contractor may pay that benefit equivalent amount or provide benefits that cost at least that sum per hour.   Paying cash in lieu of providing benefits is administratively simpler, but more costly, since the wage equivalent is fully taxable. Many employers nonetheless pay cash in lieu of benefits because doing so helps them attract and keep highly skilled employees – for example, military retirees – who don’t need insurance and who prefer the cash.  So far, so good.

But the “Play or Pay” provisions of the Affordable Care Act, 26 U.S.C. § 4980H, make no exception for Service Contract Act contractors who pay the cash equivalent of the cost of health insurance instead of providing the insurance.  As a result, unless they make changes in 2013, such employers may find themselves, starting in 2014, paying more than the actual cost of health insurance in extra wages and withholding taxes and also paying $2,000 per full time employee (in excess of the first 30), the non-deductible ACA “Play or Pay” tax assessed under 26 U.S.C. § 4980H(a).

Making changes may not be easy.  Many Service Contract Act employees are union-represented.  Unions will want to negotiate the decision and the effect on employees of offering ACA-compliant insurance instead of paying the cash equivalent.  Refusing to negotiate may provoke NLRB charges, investigations and litigation.  But negotiating may take months.  For employers in this predicament, now would be a good time to get started.