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Notice 2015-87 distinguished between "unconditional" and "conditional" opt-out arrangements.

Unconditional opt-out arrangements are those in which the opt-out payments are conditioned solely on an employee declining the employer-sponsored coverage (i.e. an employee declines coverage and gets cash).

Conditional opt-out arrangements are those in which the opt-out payments are conditional on an employee declining coverage and satisfying some other meaningful requirement related to the provision of healthcare, such as a requirement to provide proof of coverage by a spouse's employer (i.e. if an employee declines coverage, but to get the cash, the employee must provide of alternative group coverage.)

The proposed regulations clarify that employer contributions to a Section 125 plan that may be used by an employee to purchase minimum essential coverage are not opt-out payments subject to these rules. However, an employer offering cash-in-lieu under a Section 125 plan still may face affordability issues under the employer mandate.

The most notable employer impact created by these prosed regulations is a new requirement that if an employer offers cash-in-lieu, the offer must be made under an "eligible opt-out arrangement" to avoid increasing an employee's premium contribution by the cash amount when the employer calculates affordability for the employer  mandate.

Determining affordability with an unconditional opt-out arrangement

For employers offering unconditional opt-out payments, the proposed regulations adopt the rule that an employee's required premium contribution includes the amount the employee could receive if he or she had declined coverage.  In other words, the cash an employee could receive for declining coverage will be added to the employee's premium toward the lowest cost plan then the employer runs the affordability calculation.  The proposed regulations analogized the scenario to a salary reduction and reasoned that, in both situations, an employee must forego a specified amount of cash compensation to enroll in coverage.  Therefore, the opt-out payment effectively increases the employee's required contribution.

For example, XYZ offers employees the lowest cost health plan at a total premium of $400 per month.  Employees must contribute $80 toward the premium if they enroll in coverage.

However, employees who opt out of coverage get $350 per month.  The IRS will consider this to be an unconditional opt-out arrangement because the employee automatically gets cash for opting out without having to satisfy any additional condition.  When XYZ calculates affordability, the employee contribution toward the lowest cost health plan will be $430 ($350 + $80), thereby making the coverage unaffordable. XYZ will have exposure to potential penalties for offering unaffordable coverage under the ACA's employer mandate.

Determining Affordability with an Eligible Opt-Out Arrangement. Notice 2015-87 stated that employers with a conditional opt-out arrangement were not required to add the cash opt-out amount to  the employee's  premium  contribution  when calculating affordability.

According to this notice, it appeared that an employer who required employees to  provide proof of alternative group health coverage in order to receive cash-in-lieu would not have to  add the  cash amounts to the  affordability  determination.

However, the new proposed regulations state that only an arrangement that qualifies as an "eligible opt-out arrangement" will escape the requirement that the cash be added to the employee's premium contribution. An "eligible opt-out arrangement" means an arrangement that requires the following:

  1. The employee must provide proof of minimum essential coverage through another source (other than coverage in the individual market, whether or not obtained through Covered California).  This requirement includes government sponsored programs such as most Medicaid coverage, Medicare part A, CHIP, and most TRICARE coverage;
  1. The proof of coverage must show that the employee and all individuals in the employee's expected tax family have (or will have) the required minimum essential coverage. An employee's expected tax family includes all individuals for whom the employee reasonably expects to claim a personal exemption deduction for the taxable year(s) that cover the employer's  plan year to  which the  opt-out arrangement applies;
  1. The employee must provide reasonable evidence of the MEC for the applicable period.  Reasonable evidence may include an attestation by the employee;
  1. The arrangement must provide that the evidence/attestation be provided every plan year;
  1. The evidence/attestation must be provided no earlier than a reasonable time before coverage starts (e.g. open enrollment). The arrangement can also require the evidence/attestation to  be  provided  after the  plan year starts; and
  1. The arrangement must provide the opt-out payment cannot be made (and the employer must not in fact make payment) if the employer knows that the employee or family member doesn't have the alternative coverage.

If these conditions are met, the opt-out arrangement is an "eligible opt-out arrangement," meaning that the amount of the opt-out payment is excluded from the employee's required premium contribution for the affordability calculation. Employers who wish to maintain cash- in-lieu arrangements outside of a Section 125 plan should start revising the terms of the arrangement to meet the "eligible opt-out arrangement" definition.

Eligible opt-out arrangement rules continue to apply if alternative coverage terminates before end of plan year.

In some cases, an employee's or a member of the employee's expected tax family's alternative coverage may terminate before the end of the employer's plan year. The proposed regulations provide that, in such cases, an employer may continue to exclude the amount of the opt-out payment from  the  affordability determination  for the  remainder of the  plan year as  long  as the  reasonable evidence rule  is  satisfied.

Opt-out payments under collective bargaining agreements get some relief

The proposed regulations adopt the general transition relief provided in Notice 2015-87. All employers are not required to increase the amount of the employee's contribution by the opt- out amount until the Jan. 1, 2017 plan year, as  long  as the employer maintained the  arrangement prior to  Dec. 16,   2015.

Employers with collective bargaining agreements now have additional relief.  Employers are not required to increase the amount of an employee's required premium contribution by opt- out payments that do not qualify under an eligible opt-out arrangement, until the later of: (1) the beginning of the first plan year that begins following the expiration of the CBA in effect before Dec. 16, 2015 (disregarding any extensions on or after Dec. 16, 2015),  or (2) the applicability date of the regulations. The proposed regulations clarified that there will not be a permanent exception for opt-out arrangements provided under CBAs.

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