Opt-Out Arrangements and Affordability of Employer-Sponsored Coverage
New Proposed Rule on Opt-Out Arrangements and Affordability of Employer-Sponsored Coverage
The IRS has released a proposed rule addressing how opt-out arrangements are taken into account for purposes of determining whether an employer-sponsored group health plan offers affordable coverage. An opt-out arrangement is an arrangement whereby an employer offers its employees a cash payment in exchange for declining coverage under the employer-sponsored plan.
Affordability of Employer Sponsored Coverage
As a reminder, applicable large employers (ALEs) may be subject to a “pay or play” penalty if any of the employer’s full-time employees receives a premium tax credit to purchase coverage through a Health Insurance Marketplace because the employer-sponsored coverage is either unaffordable to the employee or does not provide minimum value.
For plan years beginning in 2016, an employer-sponsored plan is considered “affordable” if the portion of the annual premium an employee must pay for self-only coverage (the “required contribution”) does not exceed 9.66% of his or her household income. (For plan years beginning in 2015, the threshold is 9.56%.)
Treatment of Opt-Out Arrangements
Under the proposed rule, the amount of any cash payment made available to an employee under an opt-out arrangement increases the employee’s required contribution for purposes of determining the affordability of the eligible employer-sponsored plan to which the opt-out arrangement relates (regardless of whether the employee enrolls in the plan or declines to enroll and receives the opt-out payment), unless the arrangement constitutes an “eligible opt-out arrangement.” An eligible opt-out arrangement is an arrangement under which the employee’s right to receive an opt-out payment is conditioned on:
- The employee declining to enroll in employer-sponsored coverage; and
- The employee providing reasonable evidence that he or she (and all other individuals for whom the employee reasonably expects to claim a personal exemption deduction for the taxable year or years that begin or end in or with the employer’s plan year to which the opt-out arrangement applies) have or will have minimum essential coverage (other than coverage in the individual market, whether or not obtained through the Marketplace) during the period of coverage to which the opt-out arrangement applies.
Until a final rule is issued and becomes applicable, except for opt-out arrangements adopted after December 16, 2015, employers are not required to increase the amount of an employee’s required contribution by amounts made available under an opt-out arrangement for purposes of any potential “pay or play” consequences.
Our Pay or Play section includes an Affordability Calculator to help employers determine whether their coverage is affordable using three safe harbors permitted under the rules.