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IRS issues guidance on opt-out payments for affordable ACA plans

by Ajay Gogna

The IRS recently issued guidance on the application of various provisions of the Affordable Care Act (ACA) to employer-provided health insurance coverage, including guidance on how employer offers of “opt-out” payments to employees are treated for purposes of determining whether healthcare coverage is affordable.

Analysis of the guidance
The ACA requires applicable large employers (ALEs) with 50 or more full-time employees to provide “affordable” health insurance coverage to their employees. In general, the affordability of an offer of coverage depends on whether the employee’s required contribution exceeds an indexed percentage of household income or wages (9.66 percent in 2016 and 9.69 percent in 2017).

The IRS guidance explains that an “opt-out payment” is an amount an ALE offers to an employee that (1) cannot be used to pay for coverage under the employer’s health insurance plan and (2) is available only if the employee declines coverage under the employer’s health insurance plan (which includes waiving coverage in which he would otherwise be enrolled).

The IRS clarified that an opt-out payment may have the effect of increasing an employee’s required contribution for healthcare coverage beyond the amount of any salary reduction contribution. For instance, if an ALE offers group health insurance coverage through a 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 offer of $100 in additional compensation has the economic effect of increasing the employee’s contribution for the coverage. In that case, the employee contribution for the group health plan used to determine whether the coverage meets the affordability requirement would be $300 per month ($200 + $100).

An “unconditional opt-out arrangement” is an arrangement that provides for a payment conditioned solely on an employee declining coverage under an employer’s health insurance plan and not on the employee satisfying any other meaningful requirement related to the provision of health care to employees (such as a requirement to provide proof of coverage by a spouse’s employer). Therefore, if an ALE conditions the opt-out payment on employees providing proof of health insurance coverage under their spouses’ employers’ health insurance plans, the opt-out payment would not be an unconditional opt-out payment and would not need to be added to the salary reduction amount.

The U.S. Department of the Treasury and the IRS intend to issue regulations reflecting this rule for the treatment of employer offers of opt-out payments conditioned not only on an employee declining employer-sponsored coverage but also on the satisfaction of additional requirements (such as the employee providing proof of having coverage through a spouse’s employer or other coverage). Treasury and the IRS anticipate that the regulations will generally only be applicable for periods after the issuance of regulations.

Bottom line
ALEs offering opt-out credits to employees should avoid doing so under an unconditional opt-out arrangement. If the opt-out credit is offered under an unconditional opt-out arrangement, the amount of the opt-out credit will increase an employee’s required contribution amount, which negatively affects whether her health insurance coverage is affordable.

Ajay Gogna is an attorney with Day Pitney LLP, practicing in the firm’s Parsippany, New Jersey, office. He may be contacted at

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