Opt-Out Payments Under ACA

With calendar-year plan open enrollment season approaching, employers should consider how they treat payments made for opting out of health coverage.

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 two items when reviewing their opt-out payment arrangements.

  1. Affordability

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). 

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.

  1. Inadvertent Employer Plan

If an employer is not taxing the employee’s opt-out payment, the employer should make sure the other coverage is group, not individual, health coverage. If the coverage is individual coverage and the employee receives a pre-tax payment, it may appear as if the employer is reimbursing the employee’s individual health insurance premiums. This is generally not allowed, unless the employer is a small employer with a qualified small employer health reimbursement arrangement.

Employers should review their opt-out policies to make sure they comply with health care reform.

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