Untangling ACA opt-out payment rules
As group health coverage premiums soar ever higher, it has become increasingly popular for employers to offer employees cash in exchange for their opting out of group coverage. When the cash opt-out payments are provided outside of a Section 125 cafeteria plan, they may have the unintended consequence of reducing the affordability of employer group health coverage, because the IRS views the cash opt-out payment as compensation that the employee effectively forfeits by enrolling in coverage.
[Note: employer flex contributions to a cafeteria plan reduce affordability unless they are “health flex contributions,” meaning that (i) the employee cannot elect to receive the contribution in cash; and (ii) the employee may use the amount only to pay for health-related expenses, whether premiums for minimum essential coverage or for medical expense reimbursements permitted under Code § 213, and not for dependent care expenses or other non-health cafeteria plan options. See IRS Notice 2015-87, Q&A 8.]
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Unaffordable coverage may entitle the employee to premium tax credits under IRC § 36, and may also exempt the employee from individual mandate duties under IRC § 5000A. This post focuses on the impact of opt-out payments on “applicable large employers” subject to employer shared responsibility duties under the ACA. For such employers, reduced affordability of coverage will impact how offers of coverage are reported under ACA reporting rules (IRC § 6056) and could trigger excise tax payments under IRC § 4980H(b).
The history of opt-out payments
By way of background, the IRS addressed opt-out payments last year in the form of Notice 2015-87, concluding that a “conditional” opt-out payment — one that requires that the employee meet a criterion in addition to declining employer group coverage, such as showing proof of other group coverage — would not affect affordability. The Notice also offered transition relief for unconditional offers (paid simply for declining employer coverage) that were in place as of Dec. 16, 2015, the date the Notice was published. Unconditional opt-out arrangements adopted after Dec. 16, 2015 do impact affordability.
Subsequently, in June 2015, the IRS addressed the affordability issue in proposed regulations under IRC § 36, governing individuals’ eligibility for premium tax credits. The proposed regulations refer to “eligible” opt-out arrangements, rather than conditional ones. An eligible opt-out payment is one under which an employee’s right to receive payment is conditioned on the employee providing reasonable evidence that the employee and all his or her dependents (the employee’s “expected tax family”) have or will have minimum essential coverage other than individual coverage (whether purchased on or off the health exchange/marketplace).
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Reasonable evidence may include the employee’s attestation to the fact of other coverage, or provision of proof of coverage, but in any event the opt-out payment cannot be made if employer knows or has reason to know that the employee/dependents does not have or will not have alternative coverage. Evidence of the alternative coverage must be provided no less frequently than every plan year, and no earlier than the open enrollment period for the plan year involved.
The proposed regulations are expected to be finalized this year and thus the “eligible opt-out arrangement” rules likely will apply to plan years beginning on or after Jan. 1, 2017. In the meantime, the following provides guidance to applicable large employers on conditional and unconditional opt-out payments for purposes of 2016 ACA compliance, and ACA reporting due to be furnished to employees and filed with the IRS early in 2017:
Unconditional opt-out arrangement: opt-out payments increase employee contributions for purposes of the “affordability” safe harbor, and should be added to line 15 of Form 1095-C, unless the arrangement was already in effect on Dec. 16, 2015. “In effect” for these purposes means that (i) the employer offered the arrangement (or a substantially similar arrangement) for a plan year that includes Dec. 16, 2015; (ii) the employer’s board of directors or authorized officer specifically adopted the arrangement before Dec. 16, 2015; or (iii) the employer communicated to employees in writing, on or before Dec. 16, 2015, that it would offer the arrangement to employees at some time in the future.
Conditional opt-out arrangement: opt-out payments do not increase employee contributions whether or not the condition is met. Do not include the opt-out payment in line 15 of Form 1095-C.
Opt-out arrangement under a collective bargaining agreement (CBA): if the CBA was in effect before Dec. 16, 2015, treat as a conditional opt-out arrangement, as above, and do not include in line 15 of Form 1095-C.
Medicare Secondary Payer Act/TRICARE Implications: An applicable large employer for ACA purposes will also be subject to provisions of the Medicare Secondary Payer Act (MSPA) that prohibit offering financial incentives to Medicare-eligible employees (and persons married to Medicare-eligible employees) in exchange for dropping or declining private group health coverage. [An employer is covered by the MSPA if it employs 20 or more employees for each working day in at least 20 weeks in either the current or the preceding calendar year.]
In the official Medicare Secondary Payer (MSP) Manual, the Centers for Medicare and Medicaid Services (CMS) takes the position that a financial incentive is prohibited even if it is offered to all individuals who are eligible for coverage under a private group health plan, not just those who are Medicare-eligible. Traditionally the CMS has not actively enforced this rule, and has focused on incentives directed at Medicare-eligible populations. However, there are reports that the CMS may be retreating from its unofficial non-enforcement position with respect to opt-out payments. At stake is a potential civil monetary penalty of up to $5,000 for each violation.
As a consequence, MSPA-covered employers with Medicare-eligible employees, or employees who are married to Medicare-eligible persons, should not put an opt-out arrangement in place, or continue an existing one, without first checking with their benefits attorney.
Finally, please note that there are similar prohibitions on financial incentives to drop military coverage under TRICARE. TRICARE is administered by the Department of Defense, but along the same principles as apply to MSPA.
The above information is a brief summary of legal developments that is provided for general guidance only and does not create an attorney-client relationship between the author and reader. Readers must seek individualized legal advice in regard to any particular factual situation.