Saturday, July 23, 2016

IRS Proposes Additional Regulations Clarifying Handling of 'Opt-Out' or 'Cash-in-Lieu' Programs Under PPACA

On July 8, 2016, the IRS issued new proposed regulations addressing the treatment of employer provided opt-out or cash-in-lieu payments to employees who elect not to take employer sponsored health plans and how those programs impact PPACA's affordability tests.  In prior posts we've discussed how the IRS has decided that any cash-in-lieu payment would be added to the amount an employee is required to pay for individual coverage, thereby making it more difficult for employers to offer Affordable plans under the law.  See Providing Cash-In-Lieu of Benefits Really Should Be Phased Out Under PPACA and IRS Confirms That Your "Opt-Out" or "Cash-in-Lieu" Program Must be Added to Employee Contributions for some of our past coverage on this topic.

In sum, this was the IRS' logic in deciding to generally add cash-in-lieu awards to an employee contribution amount in decoding Affordability under PPACA:
If an employer makes an opt-out payment available to an employee, the choice between cash and health coverage presented by the opt-out arrangement is analogous to the cash-or-coverage choice presented by the option to pay for coverage by salary reduction. In both cases, the employee may purchase the employer-sponsored 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 an equal amount of other compensation, in the case of an opt-out payment. Therefore, the economic cost to the employee of the employer sponsored coverage is the same under both arrangements. Accordingly, the employee’s required contribution generally should be determined similarly regardless of the type of payment that an employee must forgo. 
Source: Pages 19-20 of Internal Revenue Service Proposed Rulemaking  26 CFR Parts 1 and 301.

The proposed regulations are helpful in that they expound upon "conditional" opt-out payments and how those payments may be disregarded in determining plan affordability under the ACA.  The IRS now reasons that:
In an effort to provide a workable rule that balances ... competing [Affordability] concerns, the proposed regulations provide that amounts made available under conditional opt-out arrangements are disregarded in determining the required contribution if the arrangement satisfies certain conditions (an “eligible opt-out arrangement”), but otherwise the amounts are taken into account. 
Source: Page 25 of Internal Revenue Service Proposed Rulemaking  26 CFR Parts 1 and 301.

A "Conditional Opt-Out Payment" is one the conditions the employer award upon proof that the employee seeking the award is covered by another group (note that an individual plan does not count) health plan. See Footnote 1.

This is how the proposed regulations were summarized over at Franczek Radelet P.C.:
As discussed in a prior alert, late last year in Notice 2015-87 the IRS confirmed that the value of opt-out payments where the only requirement is for the employee to decline coverage (“unconditional opt-out payments”) should be counted as part of an employee’s premium payment in determining whether the employer satisfies the affordability provisions of the ACA’s employer mandate. However, Notice 2015-87 also stated that the IRS might issue proposed regulations addressing treatment of opt-out payments that are conditioned not just on the employee declining coverage but also on satisfying an additional condition (such as proving that the employee has other coverage) (“conditional opt-out payments”). 
The new proposed regulations confirm that unconditional opt-out payments will be treated as increasing the employee’s required premium payment under the ACA’s employer mandate. For employers who offered unconditional opt-out payments prior to December 16, 2015, the value of the payments can be disregarded for ACA affordability purposes until final regulations are issued. There is also temporary relief for employers that are party to a collective bargaining agreement which was in effect prior to December 16, 2015 ... [more on that here.]  
Conversely, for conditional opt-out payments, the IRS proposed regulations provide that the value of the opt-out payments can be disregarded in determining the employee’s cost, if the arrangement is an “eligible opt-out arrangement.” An “eligible opt-out arrangement” is one that conditions the opt-out payment on 
(1) the employee declining employer-sponsored coverage and 
(2) the employee providing reasonable evidence that the employee and all other individuals for whom the employee expects to claim a personal exemption deduction have minimum essential coverage (other than coverage in the individual market, whether or not obtained through an ACA marketplace exchange). 
Even where an employer receives reasonable evidence of alternative coverage, if the employer knows or has reason to know that the employee or other members of the employee’s family do not (or will not) have coverage, then the employer cannot pay the opt-out payment. Proof of coverage must be provided to the employer at least annually. Based on these requirements, eligible opt-out arrangements will primarily be those that require the employee to provide proof of coverage through a spouse’s employer sponsored group health plan. 
The proposed regulations are open for comments for 60 days....

Footnote 1: While this proposed rule does open the window back up to continue or begin cash-in-lieu programs, I still recommend you move away from that at your company.  This does not change any of the additional legal concerns we addressed in "Providing Cash-In-Lieu of Benefits Really Should Be Phased Out Under PPACA".

Additionally, look what this does to your HR/Benefits team.  You must now not only verify that the person has other coverage; but you must verify that it is group (not just individual) coverage.  That is not necessarily easy to do.  Often times insurers will still assign a "group" number to an individual card so as to align the insured's internal records with other records the insurer keeps.  This effectively turns your HR staff into the "cash in lieu police" while angering employees who don't understand why they are not getting an award for an individual plan, etc.  Time after time in my career I see employers taking a black eye for byzantine regulations that confuse employees.  This will be another of those areas for employers who wish to continue cash-in-lieu awards.

Footnote 2: I use cash-in-lieu and opt-out awards interchangeably in this post.