Should Employers Opt Out of Their Opt-Out Program?
By Danielle Capilla
Chief Compliance Officer for United Benefit Advisors
According to the 2015 UBA Health Plan Survey, fewer employers are offering bonuses to waive coverage, but for those that do, the bonus amount is on the rise. Only 2.9% of employers offered a bonus to employees to waive medical coverage in 2015, a 17.1% decrease from 3.5% two years ago. The average annual single bonus in 2015 was $1,680, which is a 10% increase from 2013.
But this trend could change. In a recent Notice, the IRS announced that it intends to propose regulations that will treat an unconditional opt-out arrangement (an arrangement providing for a payment conditioned solely on an employee declining coverage under an employer’s health plan and not on an employee satisfying any other meaningful requirement) in the same manner as a salary reduction for purposes of determining an employee’s required contribution relating to affordability.
The IRS has determined that opt-out arrangements increase an employee’s contribution for health coverage beyond the amount of the salary reduction. It provides the following example:
If an employer offers employees group health coverage through a section 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.
However, the regulations will apply only for periods after the issuance of final regulations. Until then, federal agencies also anticipate that mandatory inclusion in the employee’s required contribution of amounts offered or provided under an unconditional opt-out arrangement that is adopted after December 16, 2015, (a “non-relief-eligible opt-out arrangement”) will apply for periods after December 16, 2015. This means that employers who are subject to affordability provisions should be very cautious and consult counsel if they plan on offering a new opt-out waiver after December 16, 2015. In particular, employers who have a new opt-out program beginning on or after January 1, 2016, should consult with their legal counsel if they are subject to affordability provisions.
Employers who have had opt-out arrangements in place prior to December 16, 2015, will not be required to increase the amount of an employee’s contribution for reporting purposes on the 1095-C but individual taxpayers may rely on opt-out payments as increasing their cost for purposes of tax credit eligibility. Employees who must meet a condition to receive the opt-out payment (such as demonstrating they have minimum essential coverage from another source such as their spouse) may treat the opt-out payment as increasing their required contribution for purposes of premium tax credit eligibility.
The IRS Notice regarding opt-outs covers a long list of additional provisions, including health reimbursement arrangements (HRAs) and other employer payment plans, the impact of HRAs, flex credits, opt-out incentives or fringe benefit payments on affordability calculations relating to applicable large employers (ALEs), IRS reporting that is required for ALEs, rules for health savings accounts (HSAs) for individuals eligible for benefits administered from the Department of Veterans Affairs (VA), COBRA rules in relation to unused health flexible spending arrangement (HFSA) funds and a reiteration of safe harbors relating to good faith reporting for ALEs. For information on all these provisions, download UBA’s ACA Advisor, “IRS Notice 2015-87: HRAs, Affordability, and More”.