In Notice 2015-87, the Internal Revenue Service (“IRS”) advised that it believes that the amount of an opt-out payment effectively increases the cost of coverage to the employee by the amount of the opt-out payment. When determining whether coverage is affordable for purposes of the employer "play or pay" penalty under Section 4980H(b) of the Internal Revenue Code ("B penalty"), the amount the employee is required to contribute, plus the amount of any offered opt-out payment, is the true cost to the employee. The IRS defines an opt-out payment as "an arrangement providing for a payment conditioned solely on an employee declining coverage under an employer’s health plan and not on an employee satisfying any other meaningful requirement related to the provision of health care to employees, such as a requirement to provide proof of coverage provided by a spouse’s employer." In Notice 2015-87, the IRS indicated that it intends to propose regulations reflecting this rule.
Let’s look at an example:
Your plan charges $100 a month for employee-only coverage under the medical plan. In addition, the plan also offers each eligible employee an opt-out payment of $75 per month if the employee declines coverage under the plan, regardless of whether the employee has coverage under a spouse’s plan or elsewhere. Under the IRS’ position, when determining whether this coverage is affordable for purposes of the B penalty, the cost to the employee is $175 a month, not the lower amount of $100 a month, which is what the employee would pay if enrolled in the coverage.
For any opt-out arrangement adopted by December 16, 2015, the proposed rules will contain limited grandfathering. Until the applicability date of regulations, employers maintaining these pre-existing opt-out arrangements are not required to include the amount of the opt-out payment in the employee’s required contribution total, and the opt-out amount will not be included when determining if the coverage is affordable for purposes of the B penalty. However, an employee may treat the opt-out payment as increasing his or her required contribution for purposes of Sections 36B (premium assistance credits) and 5000A (individual shared responsibility) of the Internal Revenue Code.
However, for any arrangements adopted after December 16, 2015, the amount of the opt-out payment will be added to the required employee contribution to determine whether the coverage is affordable. Before continuing or adopting an opt-out arrangement for the 2017 plan year, a review the IRS’ proposed rules may be necessary. Since many employers are already beginning to map out 2017 plan design choices, hopefully the IRS will issue this guidance soon.