Opt-Out Payments and Flex Credits Impact Affordability Under ACA
February 11, 2016
The Affordable Care Act (“ACA”) requires that large employers offer their full-time employees affordable healthcare coverage, or pay a penalty. The IRS recently released Notice 2015-87, which clarifies how certain payments made to employees through a cafeteria plan affect the affordability of coverage. In 2016, coverage is considered affordable if the employee’s cost for employee-only coverage does not exceed 9.66% of the employee’s household income.
Opt-Out Payments
An opt-out payment is generally an amount paid to an employee if that employee declines coverage under an employer’s healthcare plan. These opt-out payments must be provided through a cafeteria plan.
According to the Notice, depending on the design of the opt-out payment, the payment may increase an employee’s required contribution for medical coverage, thereby making coverage less affordable for the employee. Specifically, if the opt-out payment is not conditioned on anything other than the employee declining coverage (i.e., an “unconditional” opt-out payment), the payment will make coverage less affordable to the employee.
For example: An employer offers healthcare coverage to an employee that costs the employee $200 per month for employee-only coverage. The employer alternatively offers the employee $100 per month in taxable wages if the employee declines coverage. Regardless of whether the employee elects coverage or the opt-out payment, the IRS views this offer as increasing the cost of coverage to the employee to $300 ($200 + $100) per month.
If an employer adopted an arrangement that provides unconditional opt-out payments on or before December 16, 2015, it will not be required to consider the opt-out payment in calculating the affordability of an employee’s healthcare until an effective date which will be provided in future regulations.
Flex Contributions
A flex contribution is generally an amount of money offered by an employer under a cafeteria plan that an employee can choose to apply to certain pre-tax benefits under the cafeteria plan, or in some circumstances can choose to receive as taxable cash.
In contrast to the IRS position on opt-out payments, the Notice indicates that a flex credit can reduce an employee’s cost of coverage if it qualifies as a “health flex contribution”. Generally, a health flex contribution is a contribution that can only be spent on medical coverage and may not be received as taxable benefit. If a flex credit does not qualify as a health flex contribution, it does not reduce an employee’s required contribution.
For example: The premium for employee-only coverage under an employer’s healthcare plan is $100 a month. The employer contributes $600 to the cafeteria plan for each employee, and that $600 may only be spent on the premium for healthcare coverage or may be contributed to the health flexible spending account. When the employer calculates whether its coverage is affordable for its employees, the cost of employee-only coverage is considered to be $50 ($100 – $50) a month.
The IRS also anticipates issuing regulations regarding the effect of flex contributions on affordability. However, for plan years beginning before January 1, 2017, so long as the flex contribution program meets certain requirements, the contribution may be taken into account to reduce the employee’s cost of coverage, even if it does not qualify as a “health flex contribution”.
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If an employer currently has either an opt-out payment or flex contribution program, we would caution against making any changes to that program, or introducing a new program, without first talking to counsel regarding how the change will affect affordability of your healthcare coverage and any potential penalties under the ACA.
This Employee Benefits Alert is intended to keep readers current on developments in the employee benefits world and in the law, and is not intended to be legal advice. If you have any questions, please contact Sandra Mihok at 412.566.1903, Kathryn English at 412.566.1226, Heather Stone Fletcher at 412.566.6112, or Paul Yenerall at 412.566.1944, or any member of the Employee Benefits and Executive Compensation Group.