Authored by Dannae L. Delano
Dec 28, 2015
Mid-December in Notice 2015-87 the Internal Revenue Service (“IRS”) confirmed that cash payments employee’s receive for opting out of employer provided health coverage must be added to the employee’s contribution amount to determine whether coverage is affordable for purposes of the Affordable Care Act’s (“ACA”) employer shared responsibility penalties.
In a single Q&A, the IRS indicated that regulations will be issued providing that employer payments an employee receives for declining health coverage must be added to the employee’s required contribution amount for the employer’s lowest cost employee-only coverage (regardless of whether the employee actually receives the payment) to determine whether the amount charged to the employee is affordable to avoid being assessed penalties. The rationalization is that the employee may purchase the health plan coverage only at the price of forgoing a specified amount of cash compensation that the employee would otherwise receive.
Example: An employer offers employees group health coverage through a §125 cafeteria plan, requiring employees who elect self-only coverage to contribute $120 per month toward the cost of that coverage, and offers an additional $100 per month in taxable wages to each employee who declines the coverage. For affordability purposes, the employee portion of lowest cost employee-only coverage would be $220 ($120 + $100) per month, because an employee electing coverage under the health plan must forgo $100 per month in compensation in addition to the $120 per month in salary reduction.
Future regulations generally apply only for periods after the issuance of final regulations. Nevertheless, the Notice anticipates mandatory inclusion in the employee’s required contribution of amounts offered or provided under an unconditional opt-out arrangement that is adopted after Dec. 16, 2015 for affordability purposes.
An opt- out arrangement will be treated as adopted after Dec. 16, 2015 unless:
For any period prior to the future effective date of final regulations, employers are not required to increase the amount of an employee’s required contribution by the amount of an opt-out payment (other than a payment made under an arrangement adopted after Dec. 16, 2015) for purposes of applicable large employer reporting (Form 1095-C) or penalty assessment under the employer shared responsibility rules.
Consequently, an employer may continue “opt-out” or “cash-in-lieu” of health coverage programs without having to include those amounts in the employee contributions provided that the employer had a published opt-out policy in place prior to Dec. 16, 2015. Note, however, that this grandfathering of policies may be suspended in final regulations issued by the IRS for future years.