Do You Provide Compensation To Employees Who Opt Out of Benefits?
“Cash-in-Lieu” Options Face Compliance Hurdles in 2017
IRS rules further regulating cash-in-lieu (opt-out) programs are effective the first day of the plan year beginning on or after January 1, 2017. The rules provide for two different types of cash-in-lieu or opt-out arrangements: conditional and unconditional.
The easiest opt-out plan administratively is an “unconditional opt-out” arrangement. An unconditional opt-out doesn’t have strings such as requiring proof of other coverage for an employee waiving coverage. As such, the IRS guidance requires that the opt-out payment be calculated as a part of the employer’s affordability calculation for employer shared responsibility purposes.
The IRS described this unconditional opt-out arrangement in Notice 2015-87 where it said:
If an employer offers to an employee an amount that cannot be used to pay for coverage under the employer’s health plan and is available only if the employee declines coverage (which includes waiving coverage in which the employee would otherwise be enrolled) under the employer’s health plan (an opt-out payment), this choice between cash and coverage presented by the offer of an opt-out payment is analogous to the cash-or-coverage choice presented by the option to pay for coverage via salary reduction. In both cases, the employee may purchase the health plan coverage only at the price of forgoing a specified amount of cash compensation that the employee would otherwise receive – salary, in the case of a salary reduction, or other compensation, in the case of the opt-out payment.
In short, the amount available as an opt-out payment is added to the employee’s premium contribution amount when an employer is calculating affordability for the ACA’s employer shared responsibility requirements. Notice 2015-87 provides this example:
If an employer offers employees group health coverage through a Section 125 cafeteria plan, requiring employees who elect self-only coverage to contribute $200 per month toward the cost of that coverage, and offers an additional $100 per month in taxable wages to each employee who declines the coverage…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.
Importantly, this calculation of affordability applies to all employees whether they elect the opt-out arrangement or not.
A conditional opt-out is excluded from the affordability calculation but, it is more administratively burdensome. The regulations deem a conditional opt-out arrangement to be an “eligible opt-out arrangement.”
The proposed regulations define an “eligible opt-out arrangement” as an arrangement under which the employee’s right to receive the opt-out payment is conditioned on:
(1) The employee declining to enroll in the employer-sponsored coverage and
(2) The employee providing reasonable evidence that the employee and all other individuals for whom the employee reasonably expects to claim a personal exemption deduction for the taxable year or years that begin or end in or with the employer’s plan year to which the opt-out arrangement applies (employee’s expected tax family) have or will have minimum essential coverage (other than coverage in the individual market, whether or not obtained through the Marketplace) during the period of coverage to which the opt-out arrangement applies.
Employers must obtain an employee’s attestation that other coverage is in place before the coverage period begins. If an employer “knows or has reason to know” that an employee or family member isn’t covered, then the employee cannot make an opt-out payment.
An employer is not required to ascertain that any alternative coverage is ongoing during the plan year. But, an employee must provide an attestation or evidence of coverage every plan year.
There are a number of other nuances to the opt-out rules including transition relief for collectively bargained plans.
Employers may also wish to keep an eye on the courts. A recent court case found that opt-out payments must be included for overtime pay purposes under the FLSA (Fair Labor Standards Act). The court case is binding only in the state of: Alaska, Arizona, California, Guam, Hawaii, Idaho, Montana, Nevada, N. Mariana Islands, Oregon and Washington. Other courts in other jurisdictions may make similar judgments.
Employers who have adopted cash-in-lieu programs or who are considering such programs would be wise to seek legal guidance in advance of implementing or renewing these options. Employers who have been offering these types of arrangements on an informal basis should also seek legal advice.