New Proposed Rules on ACA Opt-Out Payments

Written by Eva A. Rasmussen

The IRS has issued proposed regulations that expand upon the treatment of cash incentives provided to an employee if he waives coverage under his employer's health plan (an "Opt-Out Payment").

I. Background

As discussed in our January 25, 2016 newsletter, once the rules are finalized, if an employer offers an unconditional Opt-Out Payment, the amount of the payment must be added to the amount the employee is contributing to purchase coverage for the lowest-cost option in order to determine if the offer is affordable under the Affordable Care Act. In IRS Notice 2015-87, the IRS distinguished between unconditional Opt-Out Payments and conditional Opt-Out Payments. An unconditional Opt-Out Payment is one in which the only requirement for the payment is that the employee waives coverage under the health plan. A conditional Opt-Out Payment requires that the employee satisfy another condition in addition to waiving coverage such as obtaining alternate coverage.

II. New Guidance On Conditional Opt-Out Payments

The proposed regulations retain the rule described above with respect to unconditional Opt-Out Payments. This rule will also apply to Opt-Out Payments that are conditional upon the employee having alternate coverage unless the alternate coverage is an "eligible opt-out arrangement." An eligible opt-out arrangement must meet all of the following conditions:

  • (a) The employee must provide reasonable evidence that he and all individuals in his tax family (those for whom he expects to claim a personal tax exemption) have minimum essential coverage from an alternate source;
  • (b) The alternate source may be any type of group plan such as a spouse's or parent's plan, a union plan, Medicare or Medicaid but may not be coverage under an individual policy;
  • (c) The employee must provide reasonable evidence of the alternate coverage annually which may be an attestation by the employee; and
  • (d) No Opt-Out Payments may be paid if the employer knows that the employee or a member of his tax family does not have alternate coverage.

If all these requirements are satisfied, the Opt-Out Payment is not required to be added to the employee’s premium to determine if the insurance is affordable. It is also not required to be reported as a required employee contribution on Form 1095-C.

In the event the alternate coverage of an employee or a member of his tax family terminates before the end of a plan year, the employer may continue to exclude the Opt-Out Payment from the determination of affordability for the remainder of that plan year.

III. Effective Dates

The proposed regulations continue the transitional rule included in IRS Notice 2015-87 that a program providing unconditional Opt-Out Payments that was in effect prior to December 16, 2015 does not have to be considered for affordability purposes until the 2017 plan year (assuming, as anticipated, that final regulations are issued in 2016).

The new rules as described above for conditional Opt-Out Payments also apply for the 2017 plan year (assuming final regulations are adopted in 2016). However, to the extent an employer is a party to a collective bargaining contract, it does not have to add the Opt-Out Payment to the employee's share of the premium for arrangements that do not qualify as an eligible opt-out arrangement until the expiration of the contract in effect before December 16, 2015 (ignoring any extensions), if later than the beginning of the 2017 plan year.

IV. Next Steps

Employers should review their opt-out arrangements and revise their open enrollment materials to require employees to attest that they and their tax family members have alternate group health coverage. It would be advisable to request information about the source of the alternate coverage. Even if the inclusion of an Opt-Out Payment would not make the offer of coverage unaffordable, the amount of the employee's contribution for the lowest cost option must be accurately reflected on Form 1095-C.

If you have any questions about Opt-Out Payments or any aspect of the Affordable Care Act, please contact Eva Rasmussen (earasmussen@cbdm.com) or Richard Muser (rkmuser@cbdm.com), lead attorneys at CB&D's Employee Benefits, Executive Compensation and ERISA Litigation Group.

About the Author
Eva A. Rasmussen
Benefits Counsel
Eva A. Rasmussen concentrates on the design, implementation and communication of qualified plans and deferred compensation arrangements as well as...
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