Monday, July 18, 2016

New IRS Proposed Regulations Regarding Opt-Out Insurance Options

New proposed regulations were issued by the IRS on July 8, 2016 regarding the effect on ACA affordability rules of opt-out or “cash-in-lieu” payments by employers to employees.  Opt-out arrangements are those employer benefit provisions that offer employees cash payments in lieu of insurance coverage; they are especially beneficial to both the employer and the employee when the employee is covered as a dependent by his or her spouse’s insurance coverage and therefore does not need the employer’s coverage.  For the employer, the cash-in-lieu payments are often much less than employer premium payments; for the employee, he or she is not required to pay for unneeded coverage.

The proposed regulations now distinguish among “unconditional”, “conditional”, and “eligible” opt-out arrangements.  An unconditional opt-out arrangement is one that is not conditioned on any requirement other than the requirement that the employee waive coverage.  A conditional arrangement is one that (a) requires the employee to provide proof of other coverage in order to qualify for the opt-out but (b) does not meet all of the requirements of an eligible arrangement.  An eligible opt-out arrangement is a conditional arrangement that meets a number of strict qualifying requirements.

Employers who offer unconditional and conditional opt-out arrangements must add the amount that the employee is eligible to receive as an opt-out payment (whether or not the employee in fact receives it) to the employee’s cost of coverage for purposes of the ACA affordability rules.  An arrangement that qualifies as an eligible opt-out arrangement avoids this obligation.

The proposed regulations give the following example of the impact of the opt-out rules on the affordability calculation:

Taxpayer B is an employee of Employer X, which offers its employees coverage under an eligible employer-sponsored plan that requires B to contribute $3,000 for self-only coverage.  X also makes available to B a payment of $500 if B declines to enroll in the eligible employer-sponsored plan.  Therefore, the $500 opt-out payment made available to B under the opt-out arrangement increases B’s required contribution under X’s eligible employer-sponsored plan from $3,000 to $3,500, regardless of whether B enrolls in the eligible employer-sponsored plan or declines to enroll and is paid the opt-out payment.

Employer contributions to a Section 125 cafeteria plan, the proposed regulations note, are not opt-out payments, whether or not the employee is permitted by the cafeteria plan to receive payments as a taxable benefit and regardless of whether the employee may use cafeteria plan money to purchase minimum essential coverage on the Marketplace.  Therefore, such contributions do not increase the employee’s required health plan contribution for affordability reporting purposes.

If you have questions concerning any aspect of an opt-out arrangement, including the requirements that must be met in order for an opt-out provision to be considered to be an eligible opt-out arrangement under the regulations, please contact Don Anderson at (847) 856-5439 or