Helpful Guidance Regarding Opt-Out Payments Under the ACA
In December 2015, when the IRS issued IRS Notice 2015-87, employers were disappointed to learn of the IRS’s intended treatment of opt-out payments for affordability purposes under the pay or play penalty.
While the IRS recently issued proposed regulations affirming its position regarding the treatment of an opt-out payment for affordability purposes, fortunately the proposed regulations include helpful guidance regarding the treatment of “eligible opt-out arrangements” and opt-out payments that are currently required under collective bargaining agreements.
Background: IRS Notice 2015-87
In our January 2016 article “IRS Clarifies a Number of Health Care Issues,” we explained the IRS’s intentions to require the amount of opt-out payments or cash-in-lieu payments to be included in the affordability calculation for purposes of the Affordable Care Act’s (ACA) pay or play penalty. (Under the pay or play penalty, an applicable large employer must generally offer full-time employees coverage that is both affordable and of minimum value, or pay an excise tax.)
An opt-out payment or cash-in-lieu payment is a payment from the employer to an employee if the employee waives coverage under the employer’s group health plan. For example, if an employer charges $80 per month for employee-only coverage under the employer’s lowest-cost group health plan providing minimum value, but the employer pays employees who waive coverage $100 per month, then the cost of that coverage—for affordability purposes—is $180 per month ($80 + $100 = $180).
Temporary Relief in IRS Notice 2015-87
In IRS Notice 2015-87, the IRS provided temporary relief that allowed an employer to exclude opt-out payments from the affordability calculation if the employer adopted the opt-out arrangement before December 16, 2015. This temporary relief applies for plan years beginning before January 1, 2017 or—if later—the effective date of final regulations.
In the proposed regulations, the IRS stated that it anticipates issuing final regulations that are effective in 2016. As a result, this temporary relief will likely only apply to plan years that begin before January 1, 2017.
Eligible Opt-Out Arrangements
The proposed regulations provide a key new exception to the requirement to include the amount of an opt-out payment in the affordability calculation for “eligible opt-out arrangements.”
An eligible opt-out arrangement is an arrangement under which an employee’s right to receive the opt-out payment is conditioned on the employee providing reasonable evidence that the employee, spouse and dependents (for whom the employee reasonably expects to claim a personal exemption deduction for the tax year that begins or ends within the plan year) have alternative minimum essential coverage (other than through the individual market) during the period of coverage for which the opt-out payment applies.
The following arrangement, for example, qualifies as an eligible opt-out arrangement:
Employer X offers its employees coverage under a group health plan and requires employees to contribute $1,000 annually for employee-only coverage. If employees decline coverage under Employer X’s group health plan, Employer X provides the employee with an opt-out payment of $500. However, in order to be eligible for the opt-out payment, the employee must attest that the employee, spouse and dependents, if any, are covered under another group health plan (e.g., a group health plan that is sponsored by the spouse’s employer).
In this example, the $500 opt-out payment does not have to be added to the $1,000 cost of employee-only coverage for affordability purposes because the opt-out arrangement is an eligible opt-out arrangement.
Reasonable evidence of alternative coverage includes an employee’s “attestation” that the employee, spouse and dependents, if any, have alternative minimum essential coverage other than through the individual market—whether obtained on- or off-the-Marketplace (e.g., coverage under another group health plan). Additionally, employers are permitted—but not obligated—to require the employee to provide evidence of alternative coverage.
The employer must require the employee to provide reasonable evidence at least every plan year for which the opt-out payment applies, such as during the annual open enrollment period.
Relief for Employees Covered By CBAs
The proposed regulations also provided helpful relief to employers that are required to offer opt-out payments under the terms of a collective bargaining agreement (CBA) that was in effect before December 16, 2015. Under this relief, the opt-out payment is not required to be included in the affordability calculation until the later of:
- The first plan year beginning after the expiration of the CBA (disregarding any extensions on or after December 16, 2015); and
- The effective date of the final regulations.
This relief applies regardless of whether the opt-out arrangement required by the CBA is an eligible opt-out arrangement. The IRS has also requested comments regarding whether this relief should be extended to other types of agreements that are similar to CBAs.
If you have any questions about opt-out arrangements or whether your opt-out arrangement qualifies as an eligible opt-out arrangement, please contact the author or one of the members of the Health Care Reform Team.