The IRS July 8th proposed regulations provide that, as of the first day of the 2017 plan year, ALL payments under opt-out arrangements WILL count as employee contributions in the ACA “affordability” calculation unless the arrangement is an “eligible opt-out arrangement.” The regulations define an “eligible opt-out arrangement” as a “conditional” opt-out arrangement that meets six criteria (listed later in this article).
In 2017 Only “Eligible Opt-Out Arrangements” will NOT Count In ACA Affordability Calculation
Many employers are confused about whether opt-out” arrangements are allowed and, if so, whether such payments are taxable to employees (yes) and what their effect is on “affordability” under the Employer Shared Responsibility (ESR) provisions of the Affordable Care Act (ACA). The IRS proposed regulations (issued July 8, 2016) address the “affordability” issue and modify the guidance in IRS Notice 2015-87.
The matrix below summarizes whether and when various types of opt out arrangements will count or not count as employee contributions to coverage in determining if coverage offered is “affordable” under the ACA. Notice 2015-87 governs this for 2016, and IRS Proposed Regulations govern for 2017 and beyond. Additional detail follows the matrix.
What Opt-Out Arrangements Count as Participant Contributions in the “Affordability” Test?
|Year||Opt-Out Payments that do NOT Count in the Affordability Test||Opt-Out Payments that DO Count in the Affordability Test||Cites|
|2016||UNconditional opt-out arrangements adopted on or before December 16, 2015
Conditional opt-out arrangements, whether adopted before or after December 16, 2015
|UNconditional opt-out arrangements adopted after December 16, 2015
|IRS Notice 2015-87|
|2017||“Eligible opt-out arrangements”||All opt-out arrangements that do NOT qualify as “eligible opt-out arrangements” even if adopted on or before December 16, 2015. This includes all unconditional opt-out arrangements, and conditional arrangements that do not meet the six criteria in the Final Regs, even if such program did not count in the affordability test in 2016.||IRS Proposed Regulations, July 8, 2016|
Background: How Opt-out Arrangements Affect “Affordability”
An opt-out arrangement is an arrangement under which an employer offers a financial incentive to employees who decline employer group coverage. Arrangements may be either “conditional” or “unconditional” and under recently proposed regulations there is now an additional category called an “eligible opt-out arrangement” (which is conditional plus meets six specific criteria). These terms are defined below.
Affordability. Under ACA employer shared responsibility provisions, an ALE may be subject to penalties if coverage offered to a full-time employee is not affordable or does not provide at least minimum value, and if that full-time employee qualifies for a subsidy and buys health insurance in an exchange. Coverage is deemed affordable for an employee if the employee’s required contribution for the lowest-cost self-only coverage does not exceed 9.5% (indexed for inflation to 9.66% in 2016) of the employee’s household income or of one of three safe harbor amounts: W-2 box 1, the “rate of pay” test, or 100% of Federal Poverty Line (FPL) for one. For 2016, the affordability threshold under the FPL test is $95.63 per month, and this applies for all employees even if the other two safe harbors would result in higher thresholds. If coverage is not affordable for a full-time employee (i.e., the lowest-cost self-only coverage offered to that employee will cost the employee more than $95.63 per month), the ALE will be subject to a penalty of $270 per month for each such employee ($3,240 for all 12 months of 2016).
Prior IRS guidance provides that the employee cost for self-only coverage includes both direct employee contributions for coverage and also includes certain opt-out payments employees could have received for declining coverage. The proposed regulations and Notice 2015-87 clarify which opt-out payments must be counted as employee contributions for coverage.
Two Important Notes:
- If an opt-out payment must be counted in the affordability calculations, it will be counted for ALL full-time employees, both those who enroll in the employer group health plan and those who decline coverage and receive the opt-out payment instead. The affordability calculation will be apparent on the Form 1095-C, part II, line 15.
- No penalty applies if the employee enrolls in coverage, even if the coverage does not meet affordability. This is because employees who enroll in employer coverage are not eligible for a subsidy. The penalty only applies if the coverage is unaffordable and the employee enrolls in exchange coverage and qualifies for a subsidy.
Example: The total cost for self-only coverage is $400 per month, of which the employer pays $310 and the employee pays $90. The employer also offers all eligible employees $75 per month if they decline coverage. If the $75 opt-out payment must be counted, the employee cost for self-only coverage will be $165 per month ($90 +$75). If the opt-out payment does not have to be counted, the employee cost for self-only coverage will be $90 per month, which is less than the FPL safe harbor of $95.63 per month for 2016.
“Conditional” vs “Unconditional” Opt-Out Arrangements under Notice 2015-87
A “conditional” opt out arrangement is one under which the employer pays an employee taxable cash only if the employee declines employer group health plan coverage AND must satisfy some other meaningful requirement related to the provision of health care to employees, usually that the employee must provide proof of other health coverage (e.g., provided by a spouse’s employer).
The July 8th regulations also added “eligible out-out arrangement,” which is a conditional arrangement that also meets the six criteria listed below.
An “unconditional” opt-out arrangement is one under which the employer pays an employee taxable cash if the employee declines employer group health plan coverage, and the employee does not have to provide any evidence of or attest to having other group health coverage. The employee can decline to enroll for any reason, even if the employee does not have other coverage.
“Eligible Opt-out Arrangements” Under the July 8th Proposed Regulations
The proposed regulations provide that, as of the first day of the 2017 plan year, all payments under opt-out arrangements WILL count as employee contributions unless the arrangement is an “eligible opt-out arrangement.” The regulations define an “eligible opt-out arrangement” as one that meets the following criteria:
- The employee must provide “reasonable evidence” that the employee and all members of the employee’s tax family (dependents on his/her tax return) have or are expected to have minimum essential coverage (MEC) for the relevant period (the plan year for which the opt-out payment is offered).
- The MEC cannot be coverage in the individual market, either on or off the exchange; but it can be government coverage such as Medicare Part A, most Medicaid, CHIP and most TRICARE programs.
- “Reasonable evidence” may be the employee’s attestation.
- Reasonable evidence/attestation must be provided at least annually.
- Reasonable evidence must be provided no earlier than a reasonable period of time before coverage starts (e.g., at open enrollment), and the employer can allow employees to provide it after the plan year starts.
- The arrangement must provide that the employer cannot make opt-out payments (and the employer in fact must not) if the employer knows or has reason to know that the employee or family member does not or will not have MEC.
This means that as of 2017 the following arrangements will negatively affect the affordability calculation. (This means they will have to be counted as employee contributions in the affordability calculation.):
- All unconditional arrangements
- Conditional arrangements that do not meet these six criteria.
What this Means for Employers with or Contemplating Opt-Out Arrangements
1- As of January 1, 2017, applicable large employers will have to count all opt-out payments in the affordability calculation for all full-time employees unless the program meets the criteria above for an “eligible opt out program.” This is per the IRS Proposed regulations issued July 8, 2016.
2- For 2016, the following rules apply, per IRS Notice 2015-87:
- If the employer DOES ask for proof of other group health coverage, then the program will be considered a “conditional” opt out program and for 2016 will NOT have to be counted in the affordability calculation for any employees. Beginning in 2017 it WILL count toward affordability unless it qualifies as an “eligible opt-out program.”
- If the employer does NOT ask for proof of other group health coverage, the program will be considered an “unconditional” opt out program. If it was in place on or before December 16, 2015, then for 2016 any opt out payment will NOT have to be counted in the affordability calculation for any employees, but beginning in 2017 it WILL count toward affordability.
- If the employer does NOT ask for proof of other group health coverage, and the program was NOT in place until after December 16, 2015, any opt out payments made WILL have to be counted in the affordability calculation for full-time employees. This same result applies in 2017.
3- Whether a particular large employer will meet affordability if it must count opt-out payments as part of the employee contribution toward coverage depends on: 1) the amount employees must pay for self-only coverage, 2) the amount of the opt-out payment, 3) the applicable affordability safe harbor, and 4) the particular employees compensation level or hourly rate (unless the 100% of FPL” safe harbor is used).
- If, as of January 1, 2017, a large employer pays 100% of the employee premium for self-only coverage, offers an UNconditional opt-out arrangement, and the opt-out amount is less than $95.63 per month, the employer will meet the “100% of FPL” affordability rest, regardless of the employee’s compensation level. This result applies even though the opt-out amount will count in the affordability determination, because the affordability amount for all full-time employees will be only the employer opt-out amount that is offered ($95.63 or less). This applies for those employees who enroll and do not take the opt-out amount, as well as for those who decline to enroll and elect the opt-out payment instead.
4- As of January 1, 2017, a large employer who wants to make sure that the amount it offers as an opt-out payment will not count in the affordability calculation must offer an opt-out program qualifies as an “eligible opt out program” and meets the six criteria listed above.
5- Small employers are not subject to the affordability requirements; however, the affordability calculation may affect whether an employee (at a large or small employer) is eligible for a subsidy to buy coverage in the Marketplace and whether such employee is exempt from the individual mandate tax if s/he does not have medical coverage.