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.
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
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.
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.