- The Affordable Care Act’s Reporting Requirements for Carriers and Employers (Part 6 of 24): Reporting Group Health Plan Opt-Out Arrangements under Code § 6055
- August 25, 2015
- Law Firm: Mintz Levin Cohn Ferris Glovsky Popeo P.C. - Boston Office
- Under a common strategy for controlling group health care plan costs, employers sometimes adopt arrangements under which an employee is offered cash as an incentive to waive coverage. These arrangements are colloquially referred to as “opt-out plans” or “opt-out arrangements.” Amounts offered under opt-out arrangements—we will call them “opt-out credits”—are in some instances paid as unrestricted, taxable cash. Other opt-out arrangements might impose a requirement that, to qualify for the opt-out credit, the employee must have other group health plan coverage. And still others might offer only a choice between group health plan participation and an opt-out credit that consists of a contribution to the employee’s health flexible spending account. This post examines how opt-out credits affect an applicable large employer’s determination of affordability for purposes of complying with the Affordable Care Act’s (ACA) employer shared responsibility rules, and it explains how opt-out credits are reported.
Whether coverage is “affordable” plays a role in the ACA regulatory scheme in three instances:
- The individual mandate
- Eligibility for premium tax subsidies and cost sharing reductions
- Employer shared responsibility
Opt-out Credits and Affordability
On November 26, 2014 the Treasury Department and the IRS issued final regulations implementing the individual mandate. Among other things, these regulations provide rules for determining affordability where an employer offers opt-out flex credits. It provides:
(E) Employer contributions to cafeteria plans. Amounts made available for the current plan year under a cafeteria plan, within the meaning of section 125, are taken into account in determining an employee’s or a related individual’s required contribution if: (1) The employee may not opt to receive the amount as a taxable benefit; (2) The employee may use the amount to pay for minimum essential coverage; and (3) The employee may use the amount exclusively to pay for medical care, within the meaning of section 213. [Treas. Reg. § 1.5000A-3(e)(3)(ii)(E)]
Under this regulation, an opt-out credit may be taken into account for determining affordability for purposes of the ACA individual mandate only if the employee does not have the option to elect cash, and the credit may be used to purchase minimum essential coverage. Based on comments in the preamble to these final regulations (79 Fed. Reg. p. 70,466, 3rd column), the regulators anticipate that a similar rule will be adopted for employer shared responsibility purposes. Moreover, in their informal comments at industry and bar association meetings, Treasury and IRS representatives (expressing their own views and not that of the agency they represent) have consistently made it clear that the approach taken in the final individual responsibility regulations applies with equal force in the employer context.
The approach adopted by the final individual mandate regulations adds to the employee’s cost of coverage the opt-out amount that the employee would have to forgo in order to obtain the coverage. Applying this rule in the context of the employer shared responsibility rules makes coverage offered alongside an opt-out arrangement far less affordable. This has a substantive impact on the employer’s exposure, and it also impacts reporting on Form 1095-C.
Reporting the opt-out payment
To grasp the consequences of the rule described above, consider the following two examples:
Example 1: Employer provides a $1,500 opt-out payment that may only go the health FSA if the employee waives coverage.
NOTE: This benefit might be attractive to an employee who has other coverage under the plan of a spouse. Care must be taken, however, to ensure that the health FSA is structured as an excepted benefit. Failure to do so will trigger ACA violations relating to annual and lifetime limits and first-dollar preventive services. (For an explanation of these issues, please see our previous post on the subject.)
Example 2: Employer provides a $1,500 opt-out payment that is paid in cash if the employee waives coverage.
Assume that in both cases, the employee premium for the employer’s group health plan is $50 per month or $600 per year. Both offers are affordable under the FPL safe harbor. (Under the FPL safe harbor, if the cost of coverage is $92.38 per month or less, coverage is deemed affordable.)
NOTE: If the opt-out arrangement reimburses an employee upon proof of other coverage, the arrangement would be an employer payment plan even if the employer includes the amount in taxable income. The other coverage in this instance would have to be limited to other group health plan coverage. (For an explanation of these issues, please see our previous post on the subject.)
In Example 1, the employee cost of health coverage is $50.00 per month. Thus, the employer will enter $50 on Form 1095-C, line 15 and enter Code 2G (“4980H affordability federal poverty line safe harbor”) on line 16. That a code is entered on line 16 indicates that the employee is firewalled and that the employer will not incur a penalty under Code § 4980H(b).
In Example 2, the employee cost of health coverage is $175.00 per month. This amount consists of the $50 employee cost plus $125 per month lost opportunity cost (i.e., the $1,500 annual opt-out credit divided by 12). Since the employer is using the FPL safe harbor, which assumes that each employee earns the FPL amount, line 16 would be left blank, thereby signaling that a penalty may be due.