IRS Proposes Restrictions on Employer Opt-Out Payments for ACA Coverage Waivers

In early July the IRS issued proposed regulations addressing the effect that employer payments to employees who waive employer-sponsored health coverage, known as Opt-Out Payments, have on determining whether an ACA-covered employer must pay an ACA penalty known as the Affordability Penalty. Generally, the proposed regulation will apply to Opt-Out Payments adopted after December 16, 2015, but there will be a phase-in period for Opt-Out Payments in labor agreements.

By way of background, ACA-covered employers are subject to a monthly Affordability Penalty for each full-time employee who (1) is required to pay more than 9.66% (indexed for 2016) of the employee's household income to purchase self-only coverage under the employer’s health plan (“employee premium payment”) and (2) instead purchases individual coverage through an ACA exchange. In determining the amount of the employee premium payment and whether the affordability standard is satisfied, the proposed regulations would allow the employer to exclude the value of any Opt-Out Payment from the employee premium payment, but only where receipt of the Opt-Out Payment is conditioned on the employee’s (1) declining employer-sponsored coverage and (2) 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 exchange).  This example illustrates when the value of an Opt-Out Payment would be excluded in calculating the employee premium payment: Employer offers its employees coverage under a plan that requires Employee to contribute $3,000 for self-only coverage. Employer also makes available to Employee a payment of $500 if Employee (1) declines to enroll in the plan and (2) provides reasonable evidence that Employee and all other members of B’s expected tax family are or will be enrolled in minimum essential coverage through another source (other than coverage in the individual market, whether or not obtained through the Marketplace). The Opt-Out Payment provided by Employer is a conditional Opt-Out Payment as defined under the regulations, and, therefore, Employee’s required contribution for self-only coverage under the plan is $3,000 since the $500 Opt-Out Payment is disregarded.

On the other hand, the value of an unconditional Opt-Out Payment (i.e., Opt-Out Payments conditioned only on waiving coverage) must be included in the calculation of the employee premium payment in determining affordability.  Therefore, any unconditional Opt-Out Payment will increase the employee premium payment, and make it less likely that the premium payment will come below the 9.66% household income percentage limit. Under the same facts as in the example above, except that eligibility for the Opt-Out Payment is unconditional, the $500 Opt-Out Payment increases the employee premium payment from $3,000 to $3,500, regardless of whether the employee accepts or declines the employer’s offer of coverage.

The proposed regulations are subject to public comment and our firm will continue to monitor and report on any developments. In the meantime, we recommend that ACA-covered employers review their current and planned Opt-Out Payment arrangements to determine how these payments will be treated under the proposed regulations and what adjustments must be made to avoid ACA penalties.  If you have any questions or for more information regarding the impact of the proposed regulations or ACA requirements generally on your organization, please contact Patrick W. McGovern, Esq., pmcgovern@genovaburns.com or Gina M. Schneider, Esq., gmschneider@genovaburns.com in the Firm’s Employee Benefits Practice Group.