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An opt-out arrangement offered as part of a group health plan can provide significant advantages to employers. Through such an arrangement, employees who have alternative sources of coverage are incentivized to forego participation in the employer plan. In exchange for the waiver, the employee receives a (taxable) payment. However, recent developments - both regulatory and judicial - may undermine the effectiveness of opt-out arrangements in certain circumstances.

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.