Starting in 2017, Your Plan's Opt-Out Payment and Rules May Impact Penalties Under the Affordability Rules (However, the IRS Provides an Exception for Eligible Arrangements)
This Alert only applies to employers who pay employees to opt out of health plan coverage. Although not yet finalized, under proposed IRS rules, certain payments to employees for opting out of health plan coverage would count towards determining whether an employer-sponsored group health plan is affordable for purposes of the Affordable Care Act (ACA). The proposed rule, scheduled to apply for taxable years beginning after December 31, 20161, is at this link. This Alert summarizes the provisions of the proposed rule relating to the treatment of opt-out payments.
Action Needed Now: Employers with unconditional payments for employees opting out of the health plan should consider requiring evidence of other coverage if they want to exclude the value of the opt-out payments in determining affordability for the 2017 plan year.
Under the ACA, an employer-sponsored health plan is "affordable" if the amount the employee must pay for self-only coverage does not exceed a specified percentage of the employee's household income. This percentage is 9.66% for plan years beginning in 2016, and 9.69% for plan years beginning in 2017. Employers who do not offer affordable coverage are at risk for penalties for each employee who received subsidized coverage through the Marketplace.
In Notice 2015-87 (see questions 8 & 9) the IRS stated that payments under an unconditional opt-out arrangement (i.e., an arrangement providing for a payment solely for an employee declining coverage under an employer's health plan) are treated in the same manner as a salary reduction arrangement for purposes of determining the employee's required cost of coverage. The IRS reasoned that if an employer makes an opt-out payment available to an employee, the choice between cash and health coverage presented by the opt-out arrangement is analogous to the cash or coverage choice presented by the option to pay for coverage by salary reduction. In both cases, the employee may purchase the employer-sponsored coverage only at the price of forgoing a specified amount of cash compensation that the employee would otherwise receive--salary, in the case of a salary reduction, or an equal amount of other compensation, in the case of an opt-out payment.
For example, if an employer offers employees group health coverage, requiring employees who elect self-only coverage to contribute $200 per month toward the cost of that coverage, and offers an additional $100 per month in taxable wages to each employee who declines coverage, the offer of $100 of additional compensation has the economic effect of increasing the employee's contribution for the coverage. In this case, the employee contribution for the group health plan effectively would be $300 ($200 + $100) per month because an employee electing coverage under the health plan must forgo $100 per month in compensation in addition to the $200 per month in salary reduction.
Opt-Out Arrangements under the Proposed Regulations
In response to comments received, the proposed regulations issued on July 8, 2016, modify the rule set forth in Notice 2015-87 for unconditional opt-outs to provide a workable rule for "conditional opt-out arrangements," i.e., where availability of the opt-out payment depends on whether the employee has other group health coverage. Under the proposed regulations, an opt-out payment can be disregarded in determining affordability if it is conditioned on:
- The employee declining to enroll in the employer sponsored coverage, and
- The employee providing reasonable evidence that everyone in the employee's family has or will have minimum essential coverage2 during the period of coverage to which the opt-out arrangement applies. (The employees for this purpose are defined as all individuals for whom the employee reasonably expects to claim a personal exemption deduction for the taxable year relating to the plan year to which the opt-out relates.)
For example, if an employee's family consists of the employee, spouse, and two children, the employee would meet this requirement by providing reasonable evidence that the employee, the spouse, and the two children, will have coverage under the group health plan of the spouse's employer for the period to which the opt-out payment applies. Using the previous example, the $100 for opting out would not then count towards the cost of coverage.
An eligible opt-out arrangement must require reasonable evidence (such as an attestation or other documentation) of alternative coverage no less frequently than every plan year to which the eligible opt-out arrangement applies. Evidence cannot be provided earlier than a reasonable period before the start of the plan year. Generally, if an employer requires the attestation or documentation during its regular annual open enrollment period, the employer will meet the reasonable period requirement. Alternatively, the eligible opt-out arrangement may require evidence of alternative coverage after the start of the next plan year.
Once the reasonable evidence requirement is met, the amount of the opt-out payment continues to be excluded from affordability calculations regardless of whether: (i) the alternative coverage subsequently terminates for the employee or for any other family member, (ii) the opt-out payment is required to be adjusted or terminated due to the loss of alternative coverage, or (iii) the employee is required to provide notice of the loss of alternative coverage to the employer. However, the arrangement must state that the opt-out payment will not be made (and the payment must not in fact be made) if the employer knows or has reason to know that the employee or any other family member does not have (or will not have) the required alternative coverage.
Although the proposed regulations provide a workable rule for excluding the value of payments under eligible opt-out arrangements, sponsors of such eligible arrangements will have additional administrative and record-keeping requirements with respect to reasonable evidence. Plan sponsors may want to look at whether the additional amount taken into account as employee cost would actually cause the coverage to be unaffordable.
Cheiron consultants can assist you in developing comments or analyzing the impact of the proposed regulations on your plan design and compliance with the ACA's affordability requirement.
Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.
1 However, per special transition relief, participating employers will not be required to include payments for an unconditional opt-out arrangement that is required under the terms of a collective bargaining agreement (CBA) in effect before December 16, 2015 until the beginning of the first plan year that begins following the expiration of the CBA in effect before December 16, 2015 (disregarding any extensions on or after December 16, 2015), if that is later than December 31, 2016. This relief also applies to any successor employer adopting the opt-out arrangement before the expiration of the CBA in effect before December 16, 2015 (disregarding any extensions on or after December 16, 2015).
2 Coverage in the individual market, whether or not obtained through the Marketplace, is disregarded for this purpose.