Monday, August 10, 2015

Legal Alert: You Should be Adding in Your 'Cash in Lieu' Award to the Employee Contributions in Testing PPACA Affordability

[This post has been updated by IRS Notice 2015-87 in this post: IRS Confirms That Your "Opt-Out" or "Cash-in-Lieu" Program Must be Added to Employee Contributions.]

Melissa Ostrower, writing at Jackson Lewis has made an outstanding point regarding employer affordability standards under PPACA and the once common cash in lieu or "opt out" policies employers have offered in order to reward employees who do not sign up for benefits with them.  

Chalk this up as yet another reason to eliminate cash in lieu policies in the brave new world of Reform.  Also see my post on why Providing Cash-In-Lieu of Benefits Really Should Be Phased Out Under PPACA, here.  This, from Ms. Ostrower
... Affordable means that an employee’s required contribution for individual coverage under his employer’s the plan may not exceed 9.5 percent (indexed) of the employee’s household income. As employers do not generally have the household income information of its employees, the regulations under Internal Revenue Code Section 4980H provide three separate safe harbors under which an employer may determine affordability based on information that is readily available to the employer – (1) the Form W-2 wages safe harbor, (2) the rate of pay safe harbor, and (3) the federal poverty line safe harbor. ... 
[I]f [an] employer ... offers employees an “opt-out” payment for those who decline [medical insurance] coverage, then this opt-out amount must be counted as part of the employee contribution, according to informal discussions with Internal Revenue Service representatives (speaking in their individual rather than official capacities). ... 
While this impact of cash opt-out payments on affordability is not clearly articulated in the Section 4980H regulations, the Internal Revenue Service’s informal position described above is consistent with the final regulations relating to the requirement to maintain minimum essential coverage and makes sense from an economic standpoint. We note that the Internal Revenue Service also stated informally that it may treat similar cash payments to Service Contract Act and Davis-Bacon Act employees differently. 
Employer takeaway: If you have analyzed affordability without taking into account any opt-out payments you offer, you should take another look at whether your plan is affordable.