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IRS Issues Proposed Regulations on Health Plan Opt-Out Payments

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July 7, 2016

By Sarah A. Kregor

The Internal Revenue Service (“IRS”) has issued proposed regulations that include additional guidance on the treatment of employer-provided opt-out payments for purposes of affordability under the Affordable Care Act (“ACA”). An “opt-out” payment is a cash payment made to employees who decline to enroll in the employer’s group health plan.

As discussed in a prior alert, late last year in Notice 2015-87 the IRS confirmed that the value of opt-out payments where the only requirement is for the employee to decline coverage (“unconditional opt-out payments”) should be counted as part of an employee’s premium payment in determining whether the employer satisfies the affordability provisions of the ACA’s employer mandate. However, Notice 2015-87 also stated that the IRS might issue proposed regulations addressing treatment of opt-out payments that are conditioned not just on the employee declining coverage but also on satisfying an additional condition (such as proving that the employee has other coverage) (“conditional opt-out payments”).

The new proposed regulations confirm that unconditional opt-out payments will be treated as increasing the employee’s required premium payment under the ACA’s employer mandate. For employers who offered unconditional opt-out payments prior to December 16, 2015, the value of the payments can be disregarded for ACA affordability purposes until final regulations are issued. There is also temporary relief for employers that are party to a collective bargaining agreement which was in effect prior to December 16, 2015 that requires the employer to offer unconditional opt-out payments. For such employers, the opt-out payment does not have to be treated as part of the employee’s cost until the later of (1) the first plan year beginning after the expiration of the collective bargaining agreement (disregarding any extension on or after December 16, 2015) or (2) the effective date of final regulations. The IRS indicates in the proposed regulations that it does not intend to create a permanent exception for opt-out arrangements provided pursuant to collective bargaining agreements.

Conversely, for conditional opt-out payments, the IRS proposed regulations provide that the value of the opt-out payments can be disregarded in determining the employee’s cost, if the arrangement is an “eligible opt-out arrangement.” An “eligible opt-out arrangement” is one that conditions the opt-out payment on (1) the employee declining employer-sponsored coverage and (2) the employee providing reasonable evidence that the employee and all other individuals for whom the employee expects to claim a personal exemption deduction have minimum essential coverage (other than coverage in the individual market, whether or not obtained through an ACA marketplace exchange). Even where an employer receives reasonable evidence of alternative coverage, if the employer knows or has reason to know that the employee or other members of the employee’s family do not (or will not) have coverage, then the employer cannot pay the opt-out payment. Proof of coverage must be provided to the employer at least annually. Based on these requirements, eligible opt-out arrangements will primarily be those that require the employee to provide proof of coverage through a spouse’s employer sponsored group health plan.

The proposed regulations are open for comments for 60 days. Please let us know if you have any questions about how this guidance might impact either your current opt-out payment program or your desire to start a new opt-out payment program. 

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