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Proposal adds twist to health plan opt out rules

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Proposed IRS regulations that could penalize employers offering financial incentives to certain employees to opt out of company-provided health insurance plans also would shield employers from a health reform law affordability penalty in some cases.

Under the Patient Protection and Affordable Care Act, employers face a $3,240 penalty for each employee whose single-coverage premium exceeds 9.66% of household income — if the employee enrolls in a public exchange health plan and receives a federal premium subsidy.

While few employers require employees to pay premiums that would trigger the ACA affordability penalty, rules the IRS proposed earlier this month and effective in 2017 would significantly increase the likelihood of triggering the affordability penalty.

Under the rules, employers running the affordability test would have to count the payments they offer to employees who opt out of their health plans, as well as premiums employees are required to make to receive employer coverage.

In explaining how the health plan affordability test is to be run, the IRS said the opt-out offer is comparable to pretax contributions employees use to pay their share of the premium for employer-provided health insurance.

“In both cases, the employee may purchase the employer-sponsored 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 an equal amount of other compensation, in the case of an opt-out payment,” the IRS said.

“The economic cost to the employee of the employer-sponsored coverage is the same under both arrangements. Accordingly, the employee's required contribution generally should be determined similarly regardless of the type of payment that an employee must forgo,” the IRS said.

Take the case of an employer that requires its employees to pay $100 a month for coverage and gives $200 a month to employees that opt out of company coverage. In that example the employee's cost of coverage, under the IRS rules, would be $300 a month or $3,600 a year, an amount that could, depending on employee income, significantly increase the likelihood of triggering the ACA affordability penalty.

“That certainly would have an impact on employers with opt-out arrangements,” said Leslie Anderson, a Mercer L.L.C. partner in Minneapolis.

But the IRS also said there's a simple way for employers to avoid the affordability penalty: have employees attest that they and their dependents have coverage through another group health plan, which typically would be through the employee's spouse.

“It is a relatively easy fix. Employees would just have to attest that they and dependents have group coverage and then the opt-out payments are excluded in running the affordability test,” said Rich Stover, a principal at Xerox HR Services in Secaucus, New Jersey.

The IRS' proposed rules “will not adversely affect employers' affordability test as long as employers do some upfront work,” said Molly Iacovoni, an Aon Hewitt partner in Lincolnshire, Illinois.

Still, with a 2017 effective date, employers will have to move quickly to obtain the required health plan coverage attestation forms from employees, said Ed Fensholt, senior vice president and director of compliance services at Lockton Cos. L.L.C.'s benefit group in Kansas City, Missouri.

A small but still substantial number of employers offer opt-out arrangements. For example, a 2015 Mercer survey found that 13% of employers with at least 500 employees offered opt-out arrangements with an average payment of $1,879 per year.

Such arrangements are a “win-win for all,” said Lockton's Mr. Fensholt, since employers reduce their health plan costs by having fewer participants and employees who are typically getting coverage through a spouse's employer plan are also getting a cash payment.

Based on health care reform law formulas, benefit consultants project the employer penalty for not offering affordable coverage will rise to $3,390 in 2017, while the premium affordability income trigger will rise to 9.69% of family income.