The IRS has extended the relief available to employers who offer an “opt-out” payment to employees who decline company medical coverage. This means that for 2017, such payments, whether conditional or unconditional, will not have to be counted as employee contributions for purposes of calculating the affordability of the employer plan, provided that the opt-out arrangement was adopted before December 16, 2015. Employers who made changes to their opt-out programs in anticipation of the new rules taking effect on Jan. 1 may want to revisit their plans.
Since Notice 2015-87, the IRS had been warning employers that certain opt-out payments would count as part of the employee’s cost of obtaining employer-provided coverage. In July 2016, it confirmed its position in proposed regulations. In the IRS’s view, an “unconditional” payment, which the employee could receive simply by opting out of the employer’s plan, was an employee cost. Its reasoning was that to obtain coverage, the employee had to forego the opt-out payment (and pay his share of premiums), so the opt-out payment was effectively a salary reduction paid by the employee. As a result of counting the opt-out payment, the employee’s share of costs might make the coverage “unaffordable” and expose the employer to penalties under the employer mandate. In contrast, a “conditional” opt-out, which required evidence of other group coverage for the employee and dependents in order to opt out of employer-provided coverage, would not count as an employee cost even if the employee took the coverage. The IRS called this an “eligible opt-out arrangement.” Regardless of the type of arrangement, employers who adopted an opt-out arrangement before Dec. 16, 2016, got interim relief. They were not required to take any opt-out payments into account until final regulations were effective, which was expected to be Jan. 1, 2017.
When the final regulations came out Dec. 19, 2016, however, they surprisingly said that the IRS was still examining the rules for opt-out payments, and extended the relief for plans adopted before Dec. 16, 2015 until further regulations were issued. (Of course, the entire employer mandate may be repealed by then.) In the meantime, some employers with unconditional opt-outs moved to conditional “eligible” arrangements, and may now want to re-examine if that is still desirable.