Guidance on Employer Payment Plans Questions Continued Use of Certain Opt-Out Credits

Recent guidance from the Departments of Treasury, Labor, and Health and Human Services (the Departments) calls into question the continued viability of opt-out credits that an employer offers to employees, where the employee chooses not to enroll in the employer’s medical plan and instead receives a cash payment contingent on enrolling in coverage in the individual market. Opt-out credits may adversely impact an employer’s affordability calculation for purposes of complying with the employer mandate to offer affordable, minimum value coverage. Employers need to review plan designs for potential issues if the employer offers employees a cash payment in lieu of coverage under its medical plan.

In Notice 2015-17, the Internal Revenue Service (IRS) reiterated previous guidance on an employer payment plan, which is a health plan that either reimburses employees for the premium expenses incurred for an individual health insurance policy or directly pays a premium for an individual health insurance policy coverage on behalf of the employee. Under prior guidance, the IRS has stated that an employer payment plan fails to comply with the group market reforms under the Affordable Care Act. Notice 2015-17 clarifies that an employer payment plan includes any reimbursements or payments made to an employee based on substantiated expenses for premiums under an individual market policy, regardless of whether the reimbursement is made on a pretax or after-tax basis. In contrast, if an employer simply provides an employee with the payment of additional compensation that is not conditioned on the purchase of health insurance coverage, that arrangement is not an employer payment plan and will not be subject to the group market reforms under the Affordable Care Act for group health plans.

Therefore, under this guidance, a plan that provides for an opt-out credit (regardless of whether it’s pretax or after-tax) that conditions the receipt of the credit on the individual purchasing individual market coverage is an employer payment plan and does not meet the group market reforms under the Affordable Care Act. A group health plan that does not comply with the group market reform requirements is subject to a penalty of $100/day ($36,500 per year) per impacted individual. Limited transition relief applies to small employers and S-Corporation healthcare arrangements for 2% shareholders.