IRS Proposes Rules on Opt-Out Payments Under ACA



Opt-out payments offered by employers may be used to determine affordability under the Affordable Care Act, depending on whether they are conditional or unconditional, according to IRS proposed rules.

Under the proposed rules, opt-out payments, cash payments given to employees who opt-out of their employer-sponsored health insurance, will be treated as a salary reduction for the purposes of determining health insurance affordability if they are considered unconditional.

An unconditional opt-out payment refers to an arrangement where the employee declines employer-sponsored health insurance without satisfying any other requirements.

Conditional arrangements, those where the opt-out payment is conditioned on the employee obtaining minimum essential coverage from another source, won’t be used in computing affordability.

Issued July 6, the proposed rules primarily focus on the health insurance premium tax credit and the individual shared responsibility provision, which don’t directly affect employers. However, the proposed rules may indirectly affect employers through the employer shared responsibility provisions and the related information reporting requirements.

Under the employer shared responsibility rules, health insurance coverage is considered affordable if the employee's cost for self-only coverage under the plan does not exceed a certain percentage of the employee's annual household income. Indexed for inflation annually, affordability is set at 9.66 percent for 2016 and 9.69 percent for 2017.

Adopted from IRS Notice 2015-87, the proposed rules treat unconditional opt-out payments as a salary reduction for the purpose of determining health insurance plan affordability.

In the December 2015 Notice, the IRS requested comments on the treatment of opt-out payments.

The proposed regulations address comments stating opt-out payments conditioned on the employee having minimum essential coverage through another source, such as a spouse’s health plan, should not affect affordability.

The proposed rules stipulate that conditional opt-out arrangements must meet certain conditions to be considered an “eligible opt-out arrangement.” Those conditions include the employee declining employer-sponsored coverage and providing reasonable evidence that they and their dependents have or will obtain minimum essential coverage.

The proposed rules note that they do not affect prior guidance on employer payment plans and that conditional opt-out arrangements are not meant to act as a reimbursement arrangement for some or all of an employee’s premium for individual market coverage.

With some exceptions, the regulations are proposed to apply for taxable years beginning after Dec. 31, 2016.

See related story, ACA Premium Tax Credit Rules Address Opt-Out Payments.

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