The U.S. Department of Treasury and the Internal Revenue Service recently issued proposed rules regarding opt-out payment plans. In an opt-out payment plan, the employer offers cash to employees who decline group health insurance coverage. These proposed rules will affect employers who have 50 or more full-time employees or equivalents.
The proposed rule’s effective date is January 1, 2017. Even though the final rule has not been established, employers with a January 1, 2017 plan year should understand the proposed rules and prepare for the potential January 1st effective date.
An applicable large employer (those with 50 or more full-time employees or equivalents) must offer full-time employees health insurance coverage that is affordable and meets minimum value requirements. A large employer that does not offer this coverage to full-time employees may have to pay an employer penalty (often referred to as the Employer Mandate) if that employee purchases health insurance and receives a premium tax credit through the Health Insurance Marketplace. To meet the affordability test, the employee's cost for self-only coverage must not exceed a set percentage of their household income (9.69 percent in 2017).
The Proposed Rule
The proposed rule explains that the IRS considers the opt-out cash payment as an additional charge to the employee and should be used when determining the affordability of the employer's plan. The proposed rule has defined two opt-out arrangements, unconditional and conditional. The type of opt-out arrangement will determine whether the employer should include the opt-out payment in the affordability test.
Unconditional Opt-Out Arrangement
Under this arrangement, the employee receives the opt-out payment just by declining the coverage. This type of arrangement will require the employer to use the opt-out payment when calculating the affordability of the plan. For example, if the employer has a $100 per month premium contribution requirement and a $150 opt-out payment, the employer's required premium contribution is $250 instead of $100.
Conditional Opt-Out Arrangement
To be considered an eligible opt-out arrangement, the employer must require two conditions:
- The employee declines coverage
- The employee provides reasonable evidence that he/she has minimum essential coverage for his/her tax family that was not obtained in the individual health insurance market. This evidence should be provided at least annually.
If an employer has this arrangement, the opt-out payment does not need to be used for the affordability test. In the previous example, the employer's required premium contribution is $100.
At annual enrollment, an employer can use an attestation form from the employee as proof of other coverage. However, if the employer knows or has reason to believe that the employee does not have alternative coverage, it should not make the payment.
What Employers Should Do
Employers who have an unconditional opt-out arrangement should consider if they want to add requirements to change the arrangement to a conditional opt-out arrangement. If they keep the unconditional arrangement, they should ensure that they use both the employee premium contribution and the opt-out cash payment when determining affordability.
Employers who already have a conditional arrangement should review their plan documents and participant communication pieces. There should be new language stating that employees will qualify for the cash payment only if they have minimum essential coverage that has not been purchased through the individual health market. Two key communication pieces are the open enrollment materials explaining the opt-out plan and the attestation form that waiving employees complete. Employers will also need a process to review the attestation form.