By: HUB’s EB Compliance Team

An option for employers looking to add flexibility and choice to their benefit programs is to add an opt-out payment for those who waive health coverage. For this purpose, an opt-out payment:

  1. Is available only if the employee declines or waives coverage under an employer-sponsored health plan; and
  2. Cannot be used to pay for coverage under the employer-sponsored health plan.

As an example, imagine ABC Corp offers their full-time employees medical coverage at a cost of $100 per month for individual coverage. They also offer a $50 per month opt-out payment to full-time employees who decline or waive coverage under the ABC Corp plan. Under this arrangement, each month employees can pay $100 to take the coverage or receive $50 if they decline or waive. For purposes of determining whether the employee’s contribution is affordable under the Affordable Care Act (“ACA”) employer mandate, the employee is treated as paying $150. This means, in general, that an opt-out payment can make coverage less affordable in the eyes of the IRS.

Employer contributions to a flex credit plan are not treated as an opt-out payment, even if employees waiving health coverage may elect to receive the credit as taxable cash compensation. Employer flex credits are subject to a related, but different, set of rules and require individual analysis.

Opt-Out Considerations

Before implementing an opt-out, employers should consider the following:

Limited Affordability Exception. As noted above, the IRS generally requires that cash opt-out payments be treated like an employee contribution for purposes of determining if the plan is affordable under the Affordable Care Act. This applies to any employers subject to the ACA employer mandate. However, plans can avoid this if the employer only pays opt-out funds if certain conditions (a.k.a., the Limited Exception) are met. In brief, the Limited Exception requires employees to have other, non-individual market, coverage as a condition of receiving the opt-out payment. The requirements include:

  • The employee declines employer-sponsored major medical coverage.
  • 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 that is not individual market coverage.
  • Medicare Part A, TRICARE, Medicaid, CHIP, and other employer-sponsored coverage are considered “acceptable alternative coverage.” (NOTE: Medicare and TRICARE mandate that many employers cannot incentivize workers who are eligible for those programs to drop active health coverage.)
  • An employee’s attestation/affidavit is reasonable evidence by itself, unless the employer knows or has reason to know that the attestation/affidavit is wrong. An employer can also request other evidence.
  • Evidence/attestation of alternative coverage must be provided every plan year for which the eligible opt-out arrangement applies.
  • 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.
  • Employers may continue to exclude from affordability calculations opt-out payments for the entire plan year if the evidence/attestation was obtained at the beginning of the plan year – even if the employee or family members drop the alternative coverage mid-year.

The above rules are currently proposed regulations that have been in existence since 2016. While employers can rely on them, the IRS could modify them if and when final rules are released.

Overall Program Goals. Some employers view these programs as providing additional compensation to those who waive coverage. In doing so, they generally are of the view that (a) an opt-out payment costs less than covering an employee on the health plan, and (b) employees who enroll in coverage receive greater total rewards than those who waive, and the opt-out payment levels the playing field.

Other employers are looking to influence employees to waive the employer plan to reduce their health plan spend. However, in some cases, they may just be rewarding employees who would already waive coverage anyway or may encourage healthy individuals to drop coverage, making the overall claims experience in the plan worse. In evaluating an opt-out, the employer may want to look at the percentage of employees offered coverage who are currently enrolled, the number of spouses currently enrolled, whether spouses work and are offered coverage (which may be difficult to determine), current plan rates and levels of coverage.

If an employer has low enrollment then an opt-out may simply be rewarding those who would waive coverage anyway. Likewise, if a large number of employees don’t have a spouse enrolled in the plan, or if the spouse does not have access to coverage elsewhere, employees may not have another option for coverage that qualifies under the Limited Exception. Finally, even if the employee has a working spouse who is offered employer coverage, the opt out may not have much effect if the plan rates or level of coverage is more favorable than the spouse’s plan. There’s no one size fits all approach, but these are some factors to consider.

Pitfalls. As with many plan design considerations there are potential pitfalls. For example, employers are generally prohibited from offering Medicare-eligible individuals financial or other benefits as incentives not to enroll in, or to terminate enrollment in, a group health plan. If the employer offered an opt-out only to employees who were 65 and older, and thus theoretically Medicare eligible, it could conflict with these rules and expose the employer to significant penalties.

Similarly, employers are prohibited under the HIPAA rules from discriminating against plan participants based on health conditions. An opt-out that was offered only to employees with chronic conditions such as diabetes or rheumatoid arthritis could be construed as discrimination on the basis of a health condition.

Additionally, an employee who chooses to opt out may unexpectedly incur a large medical expense during the year and have no other coverage. Plans do not typically allow employees to enroll at that point simply because they have a medical expense. This could create additional adverse effects on the employee’s ability to work (such as a longer, more difficult recovery and additional financial stress). This issue should be clearly communicated since employees may or may not understand this risk.

Opt-outs may also be a better culture fit with some employers rather than others. For example, an employer who is focused on offering market leading benefits may want employees to enroll in their benefits. The employer may find instead that the cost of the opt-out better allocated towards enhancing benefits. On the other hand, an employer looking to more closely manage costs while maintaining benchmark level benefits may see significant value in adding an opt-out payment.

Takeaways

Opt-out payments can be a useful way for employers to enhance their benefits offerings for those who do not enroll in employer benefits. Before pursuing this strategy employers should become familiar with the rules and also consider their overall goals and motivation behind implementing an opt-out. Finally, employers should consider the potential pitfalls and how the opt-out fits in with their overall benefits strategy.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only, and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.