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Are health plan opt-out payments on their way out?

December 18, 2015

Article courtesy of Warner Norcross & Judd

Questions arise from time to time about whether the Affordable Care Act (ACA) prohibits an employer’s health plan from offering opt-out payments to employees who decline health plan coverage. The IRS has now weighed in on the issue, and employers with 50 or more full-time equivalent employees will have to think carefully about whether to continue to offer opt-out payments.

On December 16, 2015, the IRS released Notice 2015-87, which among other things states the IRS’s intention to issue regulations in the near future that would require employers to take opt-out payments into account when calculating whether health plan coverage is affordable. For example, if the monthly cost to participate in single coverage under an employer’s health plan is $150, but the employee could receive a $50 per month opt-out payment if the employee declines medical coverage, the IRS is taking the position that the employee’s cost for the coverage is actually $200 per month. Under these new rules, the IRS will require the employer to report $200 instead of $150 as the cost of coverage on line 15 of the 1095-C form and to use $200 when determining whether any affordability codes can be used on line 16 of the 1095-C form. If the coverage ends up being unaffordable for some workers, it will increase the risk of ACA penalties for the employer.  

This will not impact affordability calculations for the 2015 1095-C forms going out to employees in January of 2016. Moreover, for employers with existing opt-out programs in place by December 16, 2015, it should not affect the affordability calculation for the 2016 forms sent in January of 2017. But, any employer adopting an opt-out payment program after December 16, 2015, will have to immediately begin including the opt-out payment into its affordability calculations.

Employers who have opt-out programs in place will want to wait for the IRS to issue regulations before deciding to revise or eliminate the program, as the IRS may provide for some exceptions. For example, the IRS is likely to provide an exception for opt-out programs that require an employee to provide proof of other coverage in order to earn the opt-out payment. But once the IRS issues the regulations, any employer with an opt-out program will want to re-evaluate its program.

Contact Norbert Kugele (616.752.2186 or or any other member of our Employment Benefits Practice Group at Warner Norcross for questions concerning health plan opt-out payments.

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