IRS Issues Proposed Regulations on Opt-Out Payments

The Internal Revenue Service has released proposed regulations on opt-out payments (sometimes known as waiver bonuses) allowing them to be used to determine affordability under the Affordable Care Act (ACA). The rule addresses the issue where some employers offer employees who decline coverage a cash opt-out payment that is conditional on the employee having coverage from another source.

Last year, the IRS issued a notice saying that unconditional opt-out payments are the economic equivalent of salary reductions for the purposes of determining health insurance affordability and that it would treat them as such. The proposed regulations formalize the IRS’s position that an unconditional offer of an opt-out payment is treated as a required employee contribution for coverage for purposes of determining the affordability of employer-sponsored coverage.

However, the proposed regulations also provide that under eligible conditional opt-out arrangements, the amount offered in the salary reduction would be disregarded and not be used to determine affordability.

To be considered eligible:

  • the employee must decline enrollment in the employer-sponsored coverage; and
  • the employee must provide reasonable evidence that the employee and dependents have minimum essential coverage.

Other rules include:

  • The evidence can be a simple attestation by the employee.
  • The evidence can be provided during open enrollment or after the start of the plan year.
  • The other minimum essential coverage cannot be individual health insurance.
  • The opt-out payment can continue to be excluded from consideration if the employee terminates coverage mid-year, as long as the employer does not know or have reason to know the employee has terminated coverage.
  • The proposed rule provides transition relief for collectively bargained plans.

These rules apply for plan years beginning on and after January 1, 2017. The rules regarding opt-out payments are part of a broader set of regulations governing tax credits (subsidies) in the Marketplaces (formerly known as Exchanges). These rules clarify that if an employee declines enrollment in an affordable, minimum-value employer-sponsored plan, but is not given an opportunity to enroll in later years, the employee will be eligible for a subsidy in later years and applicable large employers (50 or more employees, including full-time equivalents in the prior calendar year) will be subject to a penalty. This rule basically makes an annual open enrollment period mandatory.


About John Garner

John Garner has over thirty five years of experience in employee benefits. He specializes in compliance, health care reform, the Health Insurance Portability and Accountability Act (HIPAA), the Consolidated Omnibus Budget Reconciliation Act (COBRA), and the Employee Retirement Income Security Act (ERISA). He helps clients with life, health, and disability benefits, cost containment, flexible benefits, and claim consulting.

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