The IRS has issued final regulations relating to the premium tax credit available to eligible individuals who enroll in Exchange coverage.

These regulations finalize many, but not all, of the provisions in the proposed regulations. The IRS is still examining issues related to opt-out payments and the impact of such payments has on affordability of employer-provided health coverage for an individuals.

On July 8, 2016, the IRS issued proposed regulations that respond to the IRS’s prior guidance on ACA affordability. IRS Notice 2015-87 laid out a number of clarifications to affordability calculations, including dollars provided as cash in lieu of an opt-out of the employer’s benefits. The prior rules stated that if an employer offers cash in lieu of benefits (i.e., taxable compensation if the employee declines coverage), then this amount would be included when determining the cost of coverage for an employee since the employee would have to forgo the cash compensation they would otherwise receive.

  • Example:  An employer offers its employee group health coverage through a Section 125 cafeteria plan.  Employees who elect self-only coverage contribute $200 per month towards the cost of that coverage.  However, if the employee declines the coverage, they are offered an additional $100 per month in taxable wages.    In this case, the employee contribution for the group health plan effectively would be $300 ($200 + $100) per month, because an employee electing coverage under the health plan must forgo $100 per month in compensation in addition to the $200 per month in salary reduction. The offer of $100 in additional compensation has the economic effect of increasing the employee’s contribution for the coverage.

Under the proposed regulations, unless an opt-out arrangement qualifies as an “eligible opt-out arrangement,” the amount of the opt-out payment will be taken into account in determining the amount of the employee’s required contribution.  The opt-out payment increases the amount that the employee is deemed to pay for employer sponsored health coverage and in turn could affect employer shared responsibility assessments. The proposed regulations define an “eligible opt-out arrangement” an arrangement under which the employee’s right to receive the opt-out payment is conditioned on:

  1. The employee declining to enroll in the employer-sponsored coverage; and
  2. The employee providing reasonable evidence that the employee and all other individuals for whom the employee reasonably expects to claim a personal exemption deduction for the taxable year or years that begin or end in or with the employer’s plan year to which the opt-out arrangement applies (employee’s expected tax family) have or will have minimum essential coverage (other than coverage in the individual market, whether or not obtained through the Marketplace) during the period of coverage to which the opt-out arrangement applies. For example, if an employee’s expected tax family consists of the employee, the employee’s spouse, and two children, the employee would meet this requirement by providing reasonable evidence that the employee, the employee’s spouse, and the two children, will have coverage under the group health plan of the spouse’s employer for the period to which the opt-out arrangement applies.[1]

An eligible opt-out arrangement must also require that the evidence of coverage be provided no less frequently than every plan year to which the eligible opt-out arrangement applies, and that the evidence be provided no earlier than a reasonable period before the commencement of the period of coverage to which the eligible opt-out arrangement applies.

The newly issued final regulations do not finalize the proposed rules on affordability implications of opt-out arrangements. The IRS is still examining the issues raised by opt-out arrangements and expects to finalize those proposed regulations separately. Until final regulations are released, employers can rely on transition relief provided in the notice and proposed regulations, even after January 1, 2017. That transition relief applies for opt-out arrangements adopted before December 16, 2015. Generally, for shared responsibility information reporting purposes, employers offering arrangements meeting the transition relief requirements need not increase an employee’s required contribution by the unconditional opt-out amount.

[1] Notice of proposed rulemaking Premium Tax Credit NPRM VI, REG-109086-15

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