IRS guidance on health plan cash opt-out arrangements

The Internal Revenue Service (IRS) recently released proposed regulations implementing and revising rules for health coverage cash opt-out payments previously issued in IRS Notice 2015-87.  Notice 2015-87 provided that employers offering unconditional cash payments to employees who decline employer-sponsored health coverage (“opt-out arrangements”) must add the cash amounts to each employee’s premium contribution when calculating affordability of coverage for the Affordable Care Act’s (“ACA”) employer mandate.  The Notice, however, provided transitional relief for opt-out arrangements adopted on or before December 15, 2016, that such plans did not have to include opt-out payments in affordability calculations until further guidance was issued.

Notice 2015-87 differentiated between “unconditional” and “conditional” opt-out arrangements.  Unconditional opt-out arrangements are those in which an employee qualifies for the cash payment solely by declining the employer-sponsored coverage.  Conditional opt-out arrangements are those in which the opt-out payments are conditioned not only on an employee declining coverage, but also satisfying additional meaningful requirements related to the provision of health care, such as a requirement to provide proof of other health coverage (e.g., coverage by a spouse’s employer).  The proposed regulations refer to conditional opt-out arrangements as “eligible opt-out arrangements”.

The proposed regulations confirm if an employer offers an unconditional opt-out arrangement, the cash amount must be added to the lowest cost employee-only premium for which the employee is eligible when calculating the affordability of the health plan.  However, if the opt-out arrangement qualifies as an eligible opt-out arrangement, the employer is not required to add the amount of the opt-out arrangement to the employee’s premium contribution when calculating affordability.  To qualify as an eligible opt-out arrangement, the opt-out arrangement must meet the following conditions: (i) the employee must provide reasonable evidence that they and all members of their “expected tax family” have, or will have, minimum essential coverage through another source (other than coverage in the individual market); (ii) such reasonable evidence can be satisfied by an attestation/affidavit by the employee; (iii) such reasonable evidence must be provided every plan year the eligible opt-out arrangement applies; (iv) such reasonable evidence must be provided no earlier than a reasonable time before coverage starts (e.g. open enrollment), but can be provided after the beginning of the plan year; and (v) the opt-out payment cannot be made if the employer knows or has reason to know that the employee or expected tax family member does not have other minimum essential coverage.

Employers are not required to include unconditional opt-out payments in the employee’s required premium contribution until the first plan year beginning on or after January 1, 2017, as long as the employer maintained the arrangement prior to December 16, 2015.  Employers with a collective bargaining agreement (CBA) are not required to increase the amount of an employee’s required premium contribution for unconditional opt-out payments until the later of the first plan year that begins on or after: (i) the expiration of the CBA in effect before December 16, 2015 (disregarding any extensions on or after December 16, 2015), or (ii) January 1, 2017.

As open enrollment periods are quickly approaching, employers must review their opt-out arrangements to make sure the arrangements comply with the new rules.