Are You Down With OOPs?: Opt-Out Payments Under the ACA

Proposed IRS regs address payments to employees who decline enrollment in their employer's health plan

By Stephanie O. Zorn September 1, 2016

In Notice 2015-87, the IRS addressed the impact of employer opt-out payments—payments made to employees who decline enrollment in an employer's group health plan—on affordability for Affordable Care Act (ACA) purposes. Employers who do not offer group health coverage that is affordable as defined under the ACA risk significant penalties. 

For 2016, group health coverage is considered affordable if the employee's cost for the least expensive self-only coverage under the plan does not exceed 9.66 percent of the employee's annual household income. For 2017, the percentage increases to 9.69 percent.

The Notice discussed two types of opt-out payments: unconditional opt-out payments—pursuant to which an employee does not have to provide any substantiation of other coverage (or anything else) in order to receive the payment—and conditional opt-out payments—pursuant to which the employee is required to provide substantiation of other coverage (such as a spouse's group health coverage, but not individual market coverage) in order to receive the payment. 

The Notice explained that, generally, unconditional opt-out payments are the equivalent of a salary reduction contribution that increases the employee's cost of coverage (subject to relief for unconditional opt-out arrangements adopted before December 16, 2015). Few specifics, however, were provided concerning conditional opt-out payments for purposes of the ACA employer mandate and informational reporting.

In recently issued proposed regulations, the IRS reaffirmed and clarified the approach described in Notice 2015-87: unconditional opt-out payments increase the employee's cost of coverage (and, accordingly, impact whether the coverage is affordable under the ACA); conditional opt-out payments made pursuant to an "eligible opt-out arrangement" do not.

So, what is a conditional payment under an eligible opt-out arrangement? It has two requirements: 

  • (a) the employee must decline enrollment in employer-sponsored coverage and 

  • (b) at least annually, the employee must provide reasonable substantiation that he/she and his/her "tax dependents"—i.e., family members including spouses and children for whom the employee expects to claim a personal exemption—have minimal essential coverage from a source other than the individual market place.

The proposed regulations generally apply beginning Jan. 1, 2017, but may be relied on by employers immediately. Employers who offer, or are considering offering, opt-out payments should review their arrangements in light of the proposed regulations.

Stephanie O. Zorn is Of Counsel in the St. Louis office of Jackson Lewis, a labor and employment law firm. © 2016, Jackson Lewis P.C. All Rights Reserved. Reposted with permission.

SHRM Online Update

At the end of 2016, the IRS was still examining issues related to opt-out payments and their impact on the affordability of employer-provided health coverage under the Affordable Care Act. The IRS said it expected to finalize the proposed regulations in the future. In the meantime, transition relief provided in the proposed regulations for opt-out arrangements in effect before Dec. 16, 2015 continues to apply into 2017.

A December 2016 alert from Conduent HR Consulting advised that:

Generally, for shared responsibility information reporting purposes (Form 1095-C), employers offering arrangements meeting the transition relief requirements need not increase an employee’s required contribution by the (unconditional) opt-out amount. ...

At this point, employers with opt-out arrangements adopted before Dec. 16, 2015 may have made changes that align with the proposed regulations. That is a reasonable, conservative approach. Those employers that have not made changes may continue to apply and rely on the transition relief. The IRS continues to study this issue and expects to issue a separate final regulation later.

However, the ultimate fate of the opt-out rules may be bound up with efforts by the Trump administration and the GOP Congress to repeal and replace the ACA.

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