Client Alert: IRS Guidance Issued On Opt Out Payments & Affordability

The IRS has finally issued guidance on the effect of opt-out payments on affordability of an employer’s offer of group health plan coverage.

Please see IRS Notice 2015-87 and the summary below for more details.  However, at least for this year (and until regulations are issued), opt-out payment arrangements do not have to be considered when calculating affordability for purposes of Employer Reporting or for Pay or Play, unless the arrangement was adopted after December 16, 2015 and is not conditioned on meeting factors other than waiving coverage.

Employers often offer “opt-out payments” to employees who waive the employers’ group health plan; such arrangements are typically provided under the employers’ Section 125 cafeteria plans.   Regulations addressing factors to consider in calculating employees’ required contributions toward health coverage indicated that such opt out arrangements could affect affordability determinations under the Employer Shared Responsibility Mandate (“Pay or Play”).  See our previous “Client Alert: Cashable Credits and Affordability” from December 11, 2014 for further explanation.

However, many employers were using only the employee’s share of the premium when determining affordability of their coverage.  With Code section 6055/6056 Employer Reporting requirements around the corner, and possible substantial Pay or Play penalties being imposed for failure to offer affordable coverage, IRS clarification on the subject was desperately needed.

Late last week (we were advised on Friday), the IRS answered by issuing IRS Notice 2015-87, Q/A-9.

As previously advised, the IRS views opt-out payments as part of the employee’s required contribution toward coverage.  See Q/A-9 at the following LINK:

“An opt-out payment may have the effect of increasing an employee’s contribution for health coverage beyond the amount of any salary reduction contribution. For example, if an employer offers employees group health coverage through a § 125 cafeteria plan, requiring employees who elect self-only coverage to contribute $200 per month toward the cost of that coverage, and offers an additional $100 per month in taxable wages to each employee who declines the coverage, the offer of $100 in additional compensation has the economic effect of increasing the employee’s contribution for the coverage. In this case, the employee contribution for the group health plan effectively would be $300 ($200 + $100) per month, because an employee electing coverage under the health plan must forgo $100 per month in compensation in addition to the $200 per month in salary reduction.”

The IRS has determined that unconditional opt-out arrangements (those offered to employees who decline coverage without imposing other conditions (such as proof of other coverage)) are to be treated in the same manner as salary reductions for determining an employee’s required contribution for affordability purposes under Pay  or Play (Code section 4980H(b)).  The IRS intends to issue proposed regulations which will also request comments on conditional opt-out arrangements (such as those requiring proof of other coverage).

The IRS anticipates that until final regulations are issued, employers will NOT have to include these payments in Forms 1095-C (Employer Reporting) or for Pay or Play Affordability purposes, except in cases of unconditional opt-out arrangements which were adopted after December 16, 2015.

“For this purpose, an opt-out arrangement will be treated as adopted after December 16, 2015 unless (1) the employer offered the opt-out arrangement (or a substantially similar opt-out arrangement) 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 the opt-out arrangement before December 16, 2015; or (3) the employer had provided written communications to employees on or before December 16, 2015 indicating that the opt-out arrangement would be offered to employees at some time in the future.”

If you have an opt-out arrangements or are thinking of implementing one, please review this issue carefully and consult with a benefits expert.

This alert just serves as a general summary of the recent IRS guidance. For more information on this issue, please contact attorney Elizabeth H. Latchana at 517.377.0826 or elatchana@fraserlawfirm.com.