DO YOU PROVIDE CASH-IN-LIEU OF BENEFITS? IF SO, YOU CAN’T AFFORD TO IGNORE THIS PROPOSED IRS REGULATION

The Internal Revenue Service (IRS) recently proposed regulations relating to the Affordable Care Act (ACA) affecting health insurance opt-out programs.  These programs are sometimes made available to employees who decline coverage from an employer-sponsored group plan.  In lieu of the group coverage, the employee receives a financial incentive from the employer, usually cash.  These programs can be conditional – where the employee declines the employer group health plan coverage and satisfies additional requirements like demonstrating alternative coverage – or unconditional – the employee declines the group coverage for any reason, even if he/she does not have other coverage. 

The ACA imposes fines on large employers that do not offer affordable health coverage to employees.  Coverage is deemed affordable if the employee’s required contribution for individual coverage does not exceed 9.66% of his/her household income.  Currently, opt-out payments are not part of the affordability calculation.  However, the proposed IRS regulation requires that unconditional opt-out payments and some conditional opt-out payments be included in the calculation. 

Consider, for example, a scenario where an employer offers a plan with a total cost for individual coverage of $300 per month, of which the employer pays $250 and the employee pays $50.  The employer also offers all eligible employees $100 per month if they opt out of the coverage.  Under the proposed regulation, unless specific conditions are satisfied, the $100 opt-out payment must be added to the employee’s share of the premium cost as part of the affordability calculation.  Therefore, under the new regulation, the cost to the employee would be $150 instead of $50, and may no longer be deemed affordable under the ACA. 

The proposed regulation provides that employers are not required to treat unconditional opt-out payments as part of the affordability calculation until January 1, 2017, so long as the opt-out arrangement was adopted by the employer before December 16, 2015.  

Employers seeking more information about the proposed regulation or any other employment matter should contact the Masud Labor Law Group with any questions.   

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