The IRS recently released proposed regulations that for the most part address matters relating to the individual shared responsibility provision; however, additional information is included that could have potential impact to applicable large employers (ALE). Specific issues applicable to ALEs are addressed below.
Opt-out Payment Arrangements and Employer Impact
Some employer health plans include an opt-out payment option. An opt-out payment option is when an employer offers an employee a cash amount if the employee declines coverage under the employer’s health plan. On July 8, 2016, the IRS released proposed regulations that include guidance on how these opt-out payments will be viewed when calculating the employee’s cost of coverage and subsequently when determining the affordability of an employer’s health plan.
The Proposed Regulations confirm that the amount of an opt-out payment made available to an employee increases the employee’s required contribution for purposes of determining the affordability of the plan. This is true regardless of whether the employee enrolls in the plan or not. Meaning, the same calculation is used for both employees receiving the opt-out payment and those that do not receive the payment because they enrolled in the plan.
|$200||Employee Contribution Toward Cost of Coverage|
|+ $100||Taxable Wages Given to Employees Who Decline Coverage|
|$300||Employee Contribution Used to Determine Whether Coverage is Affordable|
The Proposed Regulations do provide an exception to this rule which they have labeled as a “conditional opt-out arrangement.” A conditional opt-out arrangement is defined as an arrangement under which the employee’s right to receive the opt-out payment is conditioned on:
- the employee declining coverage in the employer sponsored coverage, and
- the employee providing reasonable evidence that the employee and the employee’s expected tax family have or will have minimum essential, employer-sponsored coverage such as a spouse or parent’s employer plan.
Reasonable evidence of alternative coverage includes the employee’s attestation that the employee and all other members of the employee’s expected tax family, if any, have or will have minimum essential coverage (other than coverage in the individual market, whether or not obtained through the Marketplace.)
In a conditional opt-out arrangement, amounts made available as an opt-out payment are disregarded in determining the required employee contribution and affordability of an employer’s health plan. Note: this opt-out amount may continue to be disregarded for the remainder of the period of coverage even if the alternative coverage subsequently terminates for the employee or any other member of the employee’s expected tax family.
These opt-out payment rules are to be effective for plan years beginning on or after January 1, 2017.
Annual Enrollment Opportunities & Employer Penalties
The proposed regulations clarify that if an individual declines to enroll in employer-sponsored coverage for a plan year and does not have the opportunity to enroll in coverage for one or more succeeding plan years, the individual is treated as ineligible for those succeeding years. Subsequently, this ineligibility for the plan could render that employee eligible for premium tax credits. Said another way, if employees are not given an opportunity to enroll at least annually, they are not considered eligible for the plan which could cause ALEs to be liable for Section 4980H penalties.