Latest Developments for Opt-Out Arrangements
As we have discussed in prior e-Alerts and at our seminars, over the last several years the IRS has taken a variety of sometimes inconsistent positions on the effect of employer health plan “opt-out” payments on the affordability test of the Affordable Care Act.
The IRS’s central position was expressed with the following example:
An employer charges $200 per month for its lowest cost self-only medical benefits coverage. The employer offers a $100 opt-out bonus if the employee waives coverage (or simply pays the employee $100 as cash-in-lieu of coverage). The employer is treated, for ACA affordability purposes, as “charging” the employee $300 for its lowest cost self-only coverage.
The IRS rationale is that an employee wishing to enjoy coverage must pay $200 plus “forego $100” to have coverage, and therefore the coverage “costs” the employee $300.
In IRS Notice 2015-87, the IRS provided limited relief from this position for some situations. In very general terms, the Notice stated that:
-For plan years beginning before 2017 (as defined in the Notice), employer “benefit dollars” or “flex contributions” that can be used by Section 125 plan participants for health, other benefits or cash are not added to the stated cost of the employer’s lowest cost self-only health coverage for ACA affordability test purposes.
-Until future guidance is issued, opt-out payments under grandfathered opt-out arrangements (defined below) are not added to the stated cost of the employer’s lowest cost self-only health coverage for ACA affordability test purposes.
-Until future guidance is issued, cash-in-lieu payments under union contracts, the Service Contract Act, the Davis-Bacon Act, etc. are not added to the stated cost of the employer’s lowest cost self-only health coverage for ACA affordability test purposes.
The Notice defined a grandfathered opt-out arrangement as an arrangement that:
(1) the employer offered with respect to health coverage provided for a plan year including December 16, 2015;
(2) a board, committee, or similar body or an authorized officer of the employer specifically adopted before December 16, 2015; or
(3) was communicated in writing to employees on or before December 16, 2015.
Proposed IRS regulations issued this past summer that become effective on the later of the first plan year beginning on or after January 1, 2017 or the issuance of those regulations in final form (predicted by the IRS to be issued before the end of 2016 but not yet issued) represent the latest regulatory position on this issue.
The proposed regulations add an exception to the IRS position for “eligible opt-out arrangements.” Very generally, an eligible opt-out arrangement is an arrangement under which the opt-out payments are conditioned on the employee attesting (each year) that the employee and all members of the employee’s “tax family” (i.e., the employee’s spouse and any person expected by the employee to be claimed as a dependent on the employee’s tax return) are covered or will be covered for the applicable period under other qualifying health coverage (not including individual or Marketplace coverage).
When the proposed regulations are finalized, the grandfathered opt-out arrangement exception will no longer apply, and the only opt-out arrangements eligible for relief from the IRS will be “eligible opt-out arrangements” (as defined in the final regulations).
We wanted to emphasize again how important it is for employers subject to the ACA’s employer mandate rules that have opt-out arrangements, flex dollars, benefit dollars, or cash-in-lieu features to review those arrangements against this entire, complex and growing collection of IRS guidance to ensure that they do not have ACA affordability problems currently, or beginning in 2017.
Please contact us if we can assist you with these issues.