July 27, 2016
The Internal Revenue Service (IRS) recently issued proposed regulations relating to the health insurance premium tax credit (subsidy) and the individual shared responsibility penalty under the Affordable Care Act (ACA). Included in these regulations were rules regarding the impact of "opt-out" arrangements on the affordability of employer-sponsored health coverage, and thus, the determination of an employee's eligibility for a subsidy in the Marketplace, and for employers subject to the ACA's employer shared responsibility requirement ("play or pay" or "employer mandate"), the potential for a penalty assessment under Internal Revenue Code (Code) Section 4980H(b), and having to comply with the informational reporting requirements under Code Section 6056 (in particular Form 1095-C).
Under Code Section 4980H(b), in general, an employer with at least 50 full-time equivalent employees (applicable large employer) may be subject to a penalty for each month that the employer fails to offer a full-time employee "affordable" health coverage that provides at least 60 percent minimum value. Under IRS safe harbors, coverage is deemed affordable as long as the employee's required contribution for the lowest cost option for employee-only coverage does not exceed 9.5 percent (as indexed) of the employee's required contribution for that coverage. For 2016, the indexed amount is 9.66 percent. For 2017, the percentage increases to 9.69 percent. The penalty assessment is triggered when, in lieu of enrolling in the employer's health coverage, a full-time employee enrolls in a qualified health plan purchased through the Marketplace, and receives a subsidy.
Under Code Section 6056, applicable large employers must also provide annual statements to their full-time employees and file with the IRS regarding the health coverage these employees were offered.
In general, under an opt-out arrangement (also referred to as "cash-in-lieu"), an employer makes a payment available to an employee:
Examples of common opt-out arrangements include:
Opt-out arrangements can be unconditional or conditional, and are generally treated as taxable income to the employee.Unconditional Opt-Outs
An unconditional cash-out arrangement is an arrangement in which the employer provides an employee a payment conditioned solely on his or her declining coverage under its health plan without requiring the employee to satisfy any other meaningful requirement related to an employer's provision of health care to its employees, such as a requirement to provide proof of coverage in a spouse's employer's health plan. Late last year, in Notice 2015-87 (Q/A-9), the IRS indicated that for purposes of determining whether an employer-sponsored health plan is affordable, an unconditional cash-out payment will generally increase an employee's required contribution beyond the amount of salary reduction elections, thus having the effect of increasing the cost of self-only coverage for determining whether the coverage is affordable and incurring a potential play or pay penalty.
These proposed regulations adopt the IRS position in Notice 2015-87 and confirm that an unconditional opt-out payment will increase an employee's required contribution for purposes of determining affordability under the employer mandate.
Transitional relief exists for unconditional opt-out arrangements adopted prior to December 16, 2015 until final regulations are issued. Thus, employers are not required to treat opt-out payments (other than payments under arrangements adopted after December 16, 2015) as increasing employees' required contributions for employer shared responsibility purposes (or for information reporting under Code Section 6056).Conditional Opt-Outs
A conditional opt-out arrangement is an arrangement in which receipt of a cash-out payment requires that the employee decline employer-sponsored coverage, as well as satisfy additional conditions (such as providing proof of having alternative coverage, such as coverage provided by a spouse's employer).
Notice 2015-87 did not address the impact of conditional opt-out arrangements on the affordability of employer-sponsored health coverage, or with respect to eligibility for a subsidy, but indicated that the IRS intended to provide future guidance on the issue. Under these new proposed regulations, in contrast to an unconditional opt-out arrangement, the IRS is proposing that a conditional opt-out arrangement will not increase an employee's required contribution for purposes of determining the affordability of an employer's health coverage, as long as it is an "eligible opt-out arrangement". Under an eligible opt-out arrangement, the employee's right to receive the payment is contingent on all of the following requirements being met:
The new regulations are proposed to be effective for plan years beginning on or after January 1, 2017 (final regulations are anticipated to be issued prior to the end of this year). Until then, employers are not required to include opt-out arrangements adopted prior to December 16, 2015 when determining the affordability of their health coverage.
In addition, transition relief applies to those opt-out arrangements under collective bargaining agreements that were in effect prior to December 16, 2015, until the later of either (1) the first plan year that begins following the expiration of the collective bargaining agreement, or (2) the effective date of the final regulations.
Employers currently offering cash opt-out arrangements should review their plan design provisions and assess the extent to which changes, if any, may be required to ensure the coverage offered to their employees is affordable to avoid incurring a potential play or pay penalty. In addition, employers will need to accurately report the cost of employer-provided health coverage on their employees' Forms 1095-C, and, if applicable, include the cost of any ineligible opt-out payment made. Thus, they also will need to properly communicate this information to their payroll vendors or other third party administrators responsible for the reporting function. Examples of eligible/ineligible design options include the following:
|Eligible Opt-Out Arrangements||Ineligible Opt-Out Arrangements|
The proposed final regulations are available at https://www.federalregister.gov/articles/2016/07/08/2016-15940/premium-tax-credit-nprm-vi.
Notice 2015-87 is available at https://www.irs.gov/irb/2015-52_IRB/ar11.html.
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