- Under the safe harbor, 9.5 percent of an employee's W-2 earnings are used to determine if an employer-sponsored health plan is considered affordable.
- Employers who offer an opt-out payment when an employee declines the employer's health plan need to consider how the amount of the opt-out payment may affect the affordability of their group health plan.
Employers need to take several government regulations into account when they provide opt-out payments to employees who decline the employer-sponsored health coverage, including the market reforms, the premium assistance credit, and the safe harbor. The amount of the opt-out payment may be required to be added to the premiums of the employees who elect coverage under the employer-sponsored health plan. This may affect the affordability of coverage.
Purpose and Overview
IRS Notice 2015-87 provides guidance to employers on the application of certain market reforms that apply to group health plans and various other types of health care arrangements under the Affordable Care Act (ACA). The notice covers Health Reimbursement Arrangements (HRAs); group health plans where the employer reimburses employees for some or all of the premium expenses incurred for an individual health insurance policy (as described in Revenue Ruling 61-146, 1961-2 CB25); or where the employer directly pays for an individual health insurance policy (an employer payment plan). IRS Notice 2015-87 supplements the previous guidance provided and the final regulations implementing the market reform provisions as published in the Federal Register on November 18, 2015.
This notice provides clarification regarding certain aspects of the employer shared responsibilities provisions of § 4980H, including when employers offer opt-out payments, the application of the adjusted 9.5 percent affordability threshold under § 36B(c)(2)(i)(II) to the safe harbor provisions under § 4980H, and the employer status of certain entities for § 4980H purposes.
In addition, IRS Notice 2015-87 addresses relief from penalties for employers that make good faith efforts to comply with the regulations to report information about offers made to employees in calendar year 2015.
Large employers (as defined in § 54.4980H-1(a)(4)) may be subject to an assessable payment for any month in which a full-time employee receives a premium tax credit in connection with enrollment in a qualified health plan through the Marketplace. Employees are not eligible for the premium tax credit for any month in which the employee is eligible for coverage under a minimum value employer sponsored plan that is affordable. In addition, employees who are enrolled in an eligible employer sponsor plan, regardless of whether the plan is affordable or whether it provides minimum value, are not eligible for the premium tax credit. Affordability of coverage is determined if the employee's required contribution for coverage under the plan is 9.5 percent or less than the employee's household income based on self-only coverage. This percentage increases to 9.66 percent in 2016.
Under the safe harbor, employers are not subject to an assessable payment under § 4980H(b) if the coverage offered by the employer was affordable based on the employee's W-2 wages instead of household income. Coverage is considered affordable if the employee's required contribution is no more than 9.5 percent of the employee's Form W-2 wages. This percentage increases to 9.66 percent in 2016. The affordability safe harbor applies only for the purpose of determining whether an employer is subject to the assessable payment under § 4980H(b). The safe harbor will not affect an employee's eligibility for a premium tax credit under § 36B.
Employers may pay employees a specific dollar amount if the employees decline coverage under the employer's health plan. This payment is considered an opt-out payment. In some situations, employers have an unconditional opt-out, while others have a conditional opt-out payment. A conditional opt-out requires that the employees provide proof of coverage through their spouse's employer or other coverage.
The choice between cash or coverage presented by the offer of an opt-out payment is similar to the option to pay for coverage via salary reduction. In both cases, the employees may purchase the health plan coverage only at the price of forgoing a specified amount of cash compensation that the employee would otherwise receive – salary, in the case of a salary reduction, or other compensation, in the case of the opt-out payment.
Employers must be cautious about the amount of the opt-out payment provided to employees who decline coverage.
The opt-out payment to non-covered employees could affect the covered employees' contribution beyond the salary reduction contribution when electing health coverage and could also affect the affordability of coverage. For example, if an employer offers employees group health coverage through a § 125 cafeteria plan, requiring employees who elect self-only coverage to contribute $200 per month toward the cost of that coverage, and offers an additional $100 per month in taxable wages to each employee who declines the coverage, the offer of $100 in additional compensation has the economic effect of increasing the covered employee's contribution for the health plan. In this case, the covered employee's 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. To avoid this scenario and risk changing the affordability of coverage, employers should make the opt-out payment similar to the contribution amount that the employees pay for the employer-provided health coverage.
The Treasury and the IRS have determined it is appropriate to treat an unconditional opt-out arrangement, solely on an employee declining coverage under an employer's health plan, in the same manner as a salary reduction for purposes of determining an employee's required contribution and any related consequences under § 4980H(b). The Treasury and the IRS are considering proposing regulations on the treatment of employers' offers of unconditional opt-out payments. They are also considering regulations under other conditions, such as the employee providing proof of coverage through their spouse's employer or other coverage.
The regulations would apply for periods after the issuance of final regulations. However, the Treasury and the IRS expect mandatory inclusion in the employee's required contribution of amounts offered or provided under an unconditional opt-out arrangement that is adopted after December 16, 2015.
Premium Assistance Credit
The reference to the 9.5 percent figure which determines the affordability of a health plan generally provides that an individual may be eligible for a premium assistance credit with respect to any coverage month. A coverage month does not include any month where the employee is eligible to enroll in minimum essential employer-sponsored coverage or government health coverage or TRICARE.
Internal Revenue Service, Further Guidance on the Application of the Group Health Plan Market Reform Provisions of the Affordable Care Act to Employer-Provided Health Coverage and on Certain Other Affordable Care Act Provisions, December 16, 2015, Shad Fagerland of the Office of Associate Chief Counsel (Tax Exempt and Government Entities).