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IRS Issues Opt-out Payment Proposed Rules: Impact on Employer-Sponsored Coverage

The IRS recentlyIRS Issues Proposed Rules Regarding Opt-Out Payment Rules and ACA Affordability - via CBG Benefits issued proposed regulations regarding how the Affordable Care Act’s (ACA) health coverage affordability requirements impact opt-out payments.

The main items that employers should take note of include:

  • Opt-out payments made under an unconditional opt-out arrangement will increase an employee’s required contribution
  • Opt-out payments made under a conditional opt-out arrangement are disregarded in determining the required contribution.

These proposed rules would apply to opt-out arrangements beginning on December 31, 2016.

Impact and Example Regarding Unconditional Opt-Out Arrangements

Under an unconditional option arrangement, the employee’s required contribution would be equal to the amount the employee is otherwise required to pay for health coverage plus the amount of the opt-out payment that the employee must forgo as a result of electing coverage.

Here is a brief example:

  • An employer offers employees group health coverage through a Section 125 cafeteria plan
  • Employees who elect self-only coverage are required to contribute $200 per month toward the cost of that coverage
  • The employer offers an additional $100 per month in taxable wages to each employee who declines the coverage
  • In this scenario, the offer of $100 in additional compensation has the economic effect of increasing the employee’s contribution for the coverage. Thus, the employee contribution for the group health plan effectively would be $300 ($200 + $100) per month, because an employee electing coverage under the health plan must forgo $100 per month in compensation in addition to the $200 per month in salary reduction.

Additional Information

For a more detailed look at these proposed regulations, all clients of CBG Benefits are encouraged to log-in to the CBGconnect portal and download the Compliance Bulletin on this topic.

In the meantime, if you have any questions about how these regulations may impact your company’s employee benefits program, please contact our team at 781-759-1222.

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Posted in: Benefits and Insurance, Human Resources, Legislation

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