Providing allowances for employees who opt for waiving medical coverage has been a common benefits option for years. Typical forms of waivers can range from taxable cash compensation to contributions to flexible spending accounts (FSA), 401(k) accounts, and more. However, the Affordable Care Act (ACA) has affected the risk associated with opt-out payments, especially when it comes to affordability calculations. The IRS's release of Notice 2015-87 and related proposed regulations confirmed that it's crucial to understand these risks.
How the ACA Affects Options for Employee Waivers
In July 2016, the IRS addressed the amounts paid to employees who choose to opt-out in proposed regulations. Proposed to be effective for plan years beginning on or after January 1, 2017, the proposed regulations maintain the IRS position in an earlier Notice, Notice 2015-87 (described below), with certain modifications for conditional opt-out arrangements (i.e., those that require proof of other coverage) and opt-out arrangements pursuant to a collective bargaining agreement. According to this proposed regulation, amounts paid pursuant to an unconditional opt-out arrangement generally adopted on or after December 16, 2015 must be treated as additional employee contributions for purposes of the affordability component of the employer mandate rules. Described by Benefits Expert Jim Campbell as both "extremely confusing" and a dramatic departure from previous ways of calculating affordability, this position had a dramatic impact on many applicable large employers (ALEs).
In order to calculate affordability, employers must add the cost of certain waiver compensation to the employee portion of the cost of their care plan. For unconditional opt-out arrangements generally adopted on or after December 16, 2015, an employer who charges employees $200 for monthly employee-only health coverage and pays $100/month in compensation for a waiver cannot consider $200 in affordability calculations. Instead, $300 is the figure that must be used in affordability calculations.
How Notice 2015-87 Impacts ALEs
As of the December 2015 release of Notice 2015-87, employee unconditional opt-out payments under arrangements generally adopted on or after December 16, 2015 must be considered in affordability calculations. It's important for HR leaders and benefits administrators to note that additional changes lie ahead when it comes to opt-out payments for ALEs under the ACA. The IRS may release final regulations on this issue, which could provide different rules.
What About Affordability Safe Harbor Calculations?
Coverage is affordable if the lowest cost for insuring an employee, without dependents, is no more than 9.5% (indexed) of employee W-2 wages, rate of pay, or the federal poverty line. Per Notice 2015-87 and the proposed regulations, cash payments under certain unconditional opt-out arrangements still must be considered in addition to plan coverage to determine affordability safe harbor calculations.
There are slight exceptions. You may be exempt if your opt-out arrangement was adopted on or before 12/16/2015, which can continue to not count against affordability until additional IRS guidance is released.
In addition, you may be able to reduce your affordability calculations based on certain flex credits under cafeteria plans and health reimbursement arrangements (HRAs), if the amounts can be used to pay for medical coverage.
While ACA guidelines regarding safe harbor affordability calculations and opt-out payments for employees waiving medical coverage remain confusing, the proposed regulations and Notice 2015-87 confirm that these certain payments must be included in affordability calculations. While awaiting additional clarification from the IRS, mitigating the risk associated with waivers is key.