IRS Proposes Rules Affecting Affordability, Individual Mandate Exemptions and ACA Marketplace Subsidy Eligibility

Executive Summary 

  • IRS proposed rules relating to the ACA include provisions addressing how employer-sponsored coverage affects employees’ eligibility for tax credits and exemption from individual mandate penalties. 
  • These rules indirectly affect employers’ affordability calculations where the employer offer is a cash-in-lieu of benefits incentive or an opt-out payment arrangement. 
  • Employers offering ‘unconditional’ cash-in-lieu payments must add the ACA opt-out payment amount to the employee’s required premium contribution amount when determining affordability of the plan. 
  • Exemptions from adding the ACA opt-out payments to the employee contribution-rate are available if the employer’s Plan meets certain criteria, such as the employee demonstrating proof of having attained alternative MEC-level coverage.

The IRS recently released proposed regulations implementing and modifying provisions affecting employers offering cash-in-lieu, waiver, or opt-out payments to employees under a qualified arrangement. The proposed rules are effective the first day of the plan year beginning on or after January 1, 2017. See below for highlights of the proposed regulations.

Background

Last December, the Internal Revenue Service (IRS) released IRS Notice 2015-87 addressing how to determine the affordability of an employer's offer of eligible employer-sponsored coverage if an employer also makes available an opt-out payment.   

The IRS loosely defines an opt-out payment as one that:

  1. is available only if the employee declines coverage (which includes waiving coverage in which the employee would otherwise be enrolled) under the employer-sponsored plan; and, 
  2. cannot be used to pay for coverage under the employer-sponsored plan.

The IRS requires that the cash opt-out payment be factored into the affordability calculation employers use to determine if the plan offered to employees is affordable. The ACA employer mandate requires applicable large employers to offer affordable coverage or potentially face a penalty should an employee receive a tax subsidy in the exchange marketplace. 

Opt-out payments made available under an unconditional opt-out arrangement are treated the same as a salary reduction contribution for purposes of determining an employee's required contribution. The employee’s actual premium contribution (whether elected or not), plus the opt-out payment amount will in total be the amount measured for affordability. For this purpose, an unconditional opt-out arrangement refers to an arrangement providing payments conditioned solely on an employee declining coverage under employer-sponsored coverage and not on an employee satisfying any other meaningful requirement related to the provision of health care to employees, such as a requirement to provide proof of coverage through a plan of a spouse's employer.

For a complete analysis of Notice 2015-87, see the HUB International Client Bulletin - A New Year Brings a Host of New ACA Guidance

Proposed Rules

The proposed rules provide significant changes that may affect employers with cash-out incentive arrangements. Comments to the IRS are requested by September 6, 2016, after which final regulations are expected to be released. Highlights can be found below.

Effective Date

These latest provisions are proposed to become effective on the first day of the plan year on or after January 1, 2017. Final regulations are expected before January 1, 2017. Until then, IRS Notice 2015-87 provides that employers are not required to treat opt-out payments as increasing employees’ required contributions, if the arrangement was adopted by the employer before December 16, 2015. (In other words, even unconditional opt-out arrangements remain acceptable for now - as long as they were in place before December 16, 2015.)  Special timing rules govern transition relief the IRS makes available to employers using opt-outs under the terms of a collective bargaining agreement. 

Application

The proposed regulations relate to the health insurance premium tax credit (premium tax credit) and the individual shared responsibility provision. These proposed regulations affect:

  • Individuals who enroll in qualified health plans through Health Insurance Exchanges (Exchanges, also called Marketplaces) and claim the premium tax credit;
  • Exchanges that make qualified health plans available to individuals and employers;
  • Individuals who are eligible for employer-sponsored health coverage;
  • Individuals who seek to claim an exemption from the individual shared responsibility provision because of unaffordable coverage; 
  • Although employers are not directly affected by rules governing the premium tax credit, these proposed regulations may indirectly affect employers through the employer shared responsibility provisions and the related information reporting provisions.
    • Specifically, employers offering cash-in-lieu or opt-out payment arrangements will be affected by these rules related to calculating affordability when offering such arrangements.

Opt-out Payments / Cash-in-lieu of Benefits Payments Added to Employee Affordability Calculation

Employers offering additional compensation to employees who decline coverage under the employer’s group health plan must add the amount of the opt-out payment to the employee’s required premium contribution in calculating the plan’s affordability - regardless of whether or not the employee actually enrolls in the plan or receives the opt-out payment. 

Limited Exception Allowing for Conditional Opt-out Arrangements Excluded from Affordability

The IRS does allow employers to escape affordability problems related to cash payment incentives if the employer agrees to withhold opt-out funds, unless certain conditions are met.  The IRS describes this limited exception as reserved for “eligible opt-out arrangements.” As a general matter, when meeting these specific new requirements, the employer offering a cash-in-lieu/opt-out payments may exclude the available opt-out payment from their affordability calculation. The requirements include:

  1. The employee declines employer-sponsored major medical coverage; and
  2. The employee provides reasonable evidence that they and their expected tax dependents have, or will have during the plan year, other alternative, minimum essential coverage - other than individual market coverage, whether or not through the exchange.
    • Medicare Part A, TRICARE, Medicaid, CHIP, and other employer-sponsored coverage are considered “acceptable alternative coverage.” (NOTE:  Medicare and TRICARE mandate that employers of threshold size cannot incent workers to drop active health coverage. Possible applicability of those rules should never be overlooked.)
  3. An employee’s attestation / affidavit alone is considered reasonable evidence, unless the employer knows or has reason to know that the employee or a family member is not enrolled in, or soon will be enrolled in, alternative coverage.
  4. Evidence of alternative coverage must be provided every plan year for which the eligible opt-out arrangement applies.
  5. Evidence / attestation must be obtained at a reasonable time before the coverage period begins (e.g., during open enrollment) or after the plan year starts.
  6. Employers may continue to exclude from affordability calculations opt-out payments for the entire plan year if the evidence /attestation were obtained at the beginning of the plan year – even if the employee or family members drop the alternative coverage mid-year.

Special Rule for Cafeteria Plans

The IRS clarifies that employer contributions to a cafeteria plan (e.g. a “flex credit”) that may be available for use to purchase minimum essential coverage (as well as other cafeteria plan benefit options) are not treated as an opt-out payment, even if employees waiving health coverage may collect the credit as taxable cash compensation. The IRS rational is that such contributions would not directly reduce the amount of the employee’s premium contributions, since they could be received as a taxable benefit. Given this clarification, converting a direct “cash-out” payment option into a compliant flex-credit amount, might present another helpful workaround for employers seeking to maintain an opt-out payment structure. 

Annual Open Enrollment Opportunity Required

  • Employers must provide an annual election opportunity for employees declining coverage in order to be considered to have offered affordable, minimum value coverage.

HIPAA-excepted Benefits

  • Some benefits are specifically excluded from health reform applicability.  Such programs are often referred to as “excepted benefits” (e.g., limited scope dental or vision coverage). Since these programs are not subject to health care reform requirements, an individual who enrolls in such employer-provided “excepted benefit” coverage retains full eligibility for premium tax credit

Other Considerations

A recent case out of the Ninth Circuit Court (which is binding only in the following states: Alaska, Arizona, California, Guam, Hawaii, Idaho, Montana, Nevada, N. Mariana Islands, Oregon, and Washington; but may nevertheless be examined by other courts addressing this questions) found that opt-out payments must be included in the regular rate for overtime pay purposes under the Fair Labor Standards Act (FLSA). The case involved police officers who sued their employer, a city, for three years’ worth of unpaid overtime. The question was whether cash payments made in lieu of benefits was added to compensation rate calculation resulting in the potential for overtime pay. The city treated the payment as benefits, and not compensation – this excluding it from the employees’ regular rate of pay for overtime purposes.

Employers offering cash-in-lieu of benefits or opt-out payments may also be affected by the ACA affordability calculation under the employer mandate, as discussed above. Therefore, employers with these plans are encouraged to seek legal counsel to ensure compliance with all state and federal laws affecting your plan(s).

Next Steps

Given the new administrative complexity associated with cash payments to waive health coverage, some employers are beginning to consider removing the option. Employers that wish to retain the design, and who are subject to the ACA health coverage mandate will want to carefully study how the ACA opt-out payment impacts affordability so as to appropriately structure contributions and neutralize possible ACA penalty exposure, and/or Form 1095 Line 15 reporting problems.   

Employers with cash-in-lieu of benefits / opt-out payment arrangements should also consider how to best satisfy the added requirement of obtaining annual evidence, or attestation of alternative coverage. Employers wishing to continue offering such an arrangement should ensure that, beginning with their 2017 plan year, they are prepared to obtain this required evidence annually. 

For more details, see the proposed rules, at: https://www.federalregister.gov/articles/2016/07/08/2016-15940/premium-tax-credit-nprm-vi   

For more information on the 9th Circuit case, Flores v. City of San Gabriel, see:https://cdn.ca9.uscourts.gov/datastore/opinions/2016/06/02/14-56421.pdf

NOTICE OF DISCLAIMER

The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.