Fiscal year plans may be approaching their annual enrollment period. Plans that want to offer an incentive for employees to opt-out of health coverage should consider how that payment will impact affordability for Affordable Care Act purposes.
Some employers offer a financial payment to employees who do not elect to participate in the employer’s medical plan. These “opt-out” payments may raise concerns under the Affordable Care Act. Employers should pay particularly close attention to structuring their opt-out payment arrangements.
Applicable Large Employers (ALEs) must offer coverage that is affordable and meets minimum value. Affordability is 9.5% of an employee’s household income, as indexed for inflation (9.61% for 2022).
If an employer does not want an opt-out payment to be factored into the cost of coverage, it must make sure the opt-out payment is offered only to employees who
- Decline employer-sponsored coverage, and
- Provide reasonable evidence that they and their dependents have or will have minimum essential coverage (not individual market coverage) during the plan year.
If employers can document the above factors and get proof of other coverage, the opt-out payment is ignored when determining the cost of coverage. If the employer does not get proof of other coverage, the employer must add the value of the opt-out payment into the cost of the health coverage being offered. This might impact affordability of coverage if the opt-out payment is not considered when pricing the lowest-cost single coverage plan.
Employers may wish to review their plan cost structure in advance of open enrollment.
