On July 8, 2016, the Internal Revenue Service (IRS) released proposed regulations regarding the Affordable Care Act’s (ACA) individual mandate. The proposed regulations also discuss the concept of employer-provided affordable coverage, and highlight the interaction between affordable coverage and an opt-out arrangement. While not final, the regulations provide reliable guidelines for employers who utilize opt-out provisions, as well as employers who are interested in incorporating such an arrangement into their group health plan.
What is an Opt-out Arrangement?
An opt-out arrangement, sometimes referred to as “cash in lieu of benefits,” is a payment made by an employer to an employee who waives coverage under the employer’s group plan. Though the amount of the payment is considered taxable income to the employee, the opt-out arrangement is a part of the employer’s Section 125 cafeteria plan.
There are two types of opt-out arrangements. An unconditional opt-out arrangement is one in which the employee needs to only waive coverage under the group plan in order to be eligible for the opt-out payment. The employee’s waiver is the single qualification in order to receive the payment. Alternatively, a conditional opt-out arrangement is one in which the employee must waive coverage and satisfy at least one other condition in order to receive the opt-out payment. For example, an employee may need to show proof of other health coverage at the time he or she waives coverage under the employer plan in order to be eligible for the opt-out payment.
How does the ACA Impact Opt-out Provisions?
The affordability of health coverage is a cornerstone concept of the ACA, and it arises in the contexts of both the individual and employer mandates. Previously, the IRS issued much guidance on how affordability is calculated, and the proposed regulations highlight how an opt-out arrangement will impact the affordability calculation.
Payments available under an unconditional opt-out arrangement will be taken into consideration when assessing the affordability of coverage offered by an employer regardless of whether or not the employee receives the opt-out payment. According to the IRS, this is because the cost to the employee for the coverage should include the opt-out amount the employee foregoes in order to receive coverage. Thus, the cost of coverage for the employee will be the portion of the premium for which the employee is responsible plus the amount of the opt-out payment.
Payments available under a conditional opt-out arrangement will not be taken into consideration when calculating the affordability of employer-provided coverage so long as the employee is required to annually provide proof that he or she (along with any dependents) have other minimum essential coverage.
What are the Important Considerations for Employers?
Employers who utilize a conditional opt-out arrangement will not be impacted by the new regulations, and affordability calculations will not be affected. However, employers who have an unconditional opt-out arrangement need to consider how the new regulations affect the affordability of their medical coverage. The new rules will take effect for taxable years beginning after December 31, 2016, unless the unconditional opt-out arrangement was adopted after December 16, 2015, in which case the rules will take effect as of that date.
In light of this new guidance, a conditional opt-out arrangement will likely prove more advantageous to an employer than an unconditional arrangement. However, under either arrangement, employers should ensure that signed waiver forms are on file for any employee who declines coverage.