Opt Out Payments and Affordability

Posted by BAS - 28 July, 2016

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The IRS released a Notice of Proposed Rulemaking addressing the treatment of opt-out payments when determining affordability of health coverage.  An opt-out payment is money an employee receives when declining coverage in an employer’s health plan.

If an applicable large employer does not offer affordable coverage to its full-time employees, the employer may be subject to a tax penalty.  A plan is affordable if the lowest-cost single coverage option does not exceed 6.96% of the employee’s household income.  To date (for plan years beginning before 12/2105), an opt-out payment offered by an employer has not been included in the cost of employer-provided coverage.

The IRS has advised that the cost of coverage should include the employee contribution and any amount offered to an employee for waiving coverage.  If the employee receives payment for declining coverage, and there are no additional requirements to receive that payment, the opt-out payment is added to the contributions to determine the cost to the employee.  This rule applies (for most plans) starting with plan years beginning on or after January 1, 2017. 

The inclusion in cost applies only to non-conditional opt-out payments (when the employee gets the payment regardless of any other condition).  Conditional opt-out payments (such as when an employee must show proof of other coverage to get the payment) may be excluded from being counted in the cost of coverage.

Employers who want to offer opt-out payments but who do not want them to be factored into employee cost should structure the opt-out as follows:

  • Require that the employee must decline employer coverage to receive the payment
  • Require the employee and all family members to show reasonable proof of other coverage before receiving the payment
  • Give the employer the right to deny the payment if the employer has reason to believe the person does not have other coverage
  • Require annual submission of proof of other coverage

If an employer properly structures the opt-out as conditional, it can be excluded from being counted in the cost of coverage.

 


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