ACA UPDATE: Proposed Regulations for Opt-Out Payments
Senior Compliance Attorney
ACA Update: Federal guidance issued on opt-out payments
On July 8, 2016, the IRS and Department of the Treasury issued proposed regulations regarding the health insurance premium tax credit and the individual shared responsibility provision under the Affordable Care Act (ACA). Included in these proposed regulations are rules pertaining to “opt-out” or cash-in-lieu arrangements provided in an employment context. The significant provisions related to cash-in-lieu are summarized below.
In late 2015, the IRS issued Notice 2015-87, which addressed the issue of opt-out payments and the affordability of employer sponsored coverage as required by the ACA for employers to avoid penalties. Opt-out payments are part of an arrangement provided by the employer that are available only if the employee declines coverage (which includes waiving coverage in which the employee would otherwise be enrolled) and cannot be used to pay for coverage under the employer sponsored plan.
The IRS identifies two different types of opt-out arrangements: unconditional and conditional. Here is an overview of the different arrangements:
- Unconditional opt-out arrangements: These payments are solely based on an employee declining coverage under an employer sponsored plan. To receive payment, the employee only needs to decline coverage without any other stipulations.
- Conditional opt-out arrangements: These payments are based on an employee declining coverage under an employer sponsored plan, but also require proof of alternative coverage. To receive payment, the employee needs to meet the proof of coverage threshold.
The July 2016 guidance focuses on unconditional opt-out arrangements and how they affect the affordability calculation for the employer sponsored health plan. Unconditional opt-out payments should be treated in the same manner as a salary reduction contribution for purposes of determining an employee’s required contribution for affordability purposes. In other words, the amount of the opt-out payment increases the employee’s required contribution for coverage.
The proposed regulations adopt the approach for unconditional opt-out arrangements described in Notice 2015-87. In addition, the proposed regulations expound on conditional opt-out arrangements.
Amounts made available under conditional opt-out arrangements are disregarded when determining affordability if the arrangement satisfies certain conditions, referred to as an “eligible opt-out arrangement”. Eligible opt-out arrangements condition the employee’s right to receive the opt-out payment on:
- The employee declining to enroll in the employer sponsored coverage
- The employee providing reasonable evidence that the employee and all other individuals for whom the employee reasonably expects to claim a personal exemption deduction for the taxable year or years that begin or end in or with the employer’s plan year to which the opt-out arrangement applies have or will have minimum essential coverage other than coverage in the individual market, including coverage obtained through the Marketplace.
- The employee provides reasonable evidence of other coverage. An employee’s attestation will satisfy this requirement.
- Opt-out payments will not be made if the employer knows or has reason to know that the employee or any other member of the employee’s expected tax family does not have or will not have required alternative coverage.
- The employee must provide proof of other coverage every plan year.
- The required proof must be provided no earlier than a reasonable period before the beginning of the period of coverage to which the eligible opt-out arrangement applies. Employers could obtain the information during open enrollment or at a reasonable later time.
The amount of the opt-out payment made available under an eligible opt-out arrangement may continue to be excluded from the employee’s required contribution for the remainder of the period of coverage to which the opt-out payment originally applied. The opt-out payment may be excluded for this period even if the alternative coverage subsequently terminates for the employee or any other family member of the employee’s expected tax family.
This guidance would be applicable for plan years beginning on or after January 1, 2017.
Employers offering opt-out or cash-in-lieu programs should review their arrangements to determine conditional/unconditional status. It should be noted that unconditional payments will need to be added to the employee’s cost of coverage for affordability purposes starting in 2017. Conditional payments must satisfy the requirements of an “eligible opt-out arrangement” in order for the employer to avoid including the payment amounts in the affordability calculations.
The information above is a summary of laws and regulations regarding provisions relating to provisions in the Patient Protection and Affordable Care Act (PPACA). The information should not be construed as legal or tax advice. In all cases, employers should be advised to consult with their accountant or legal counsel for assistance.