EBIA Weekly Newsletter

Proposed Regulations on Premium Tax Credits Address Affordability Implications of Opt-Out Payments

   July 13, 2016

Premium Tax Credit NPRM VI, 26 CFR Parts 1 and 301, 81 Fed. Reg. 44557 (July 8, 2016)

Available at https://federalregister.gov/a/2016-15940

The IRS has issued proposed regulations relating to health care reform’s premium tax credit and individual shared responsibility penalty provisions. A significant portion of the proposed regulations addresses how the terms of employer-sponsored coverage affect employees’ eligibility for premium tax credits and liability for individual shared responsibility. (Although the focus of the regulations is on individuals, these provisions have important implications for applicable large employers (ALEs) because ALEs who offer minimum essential coverage may be liable for Code § 4980H(b) penalties if any of their full-time employees receive premium tax credits for coverage purchased on an Exchange.) Here are highlights:

  • Cost of Employer-Sponsored Coverage. Employees’ required contributions for employer-sponsored health plans are relevant under several health care reform provisions. Individuals are not eligible for premium tax credits if they are offered affordable, minimum value coverage under an employer-sponsored health plan; coverage is deemed affordable if the employee’s required contribution for employee-only coverage does not exceed 9.5% (as indexed) of the employee’s household income. Also, individuals may be exempt from the individual shared responsibility penalty if they do not have access to affordable health coverage, including if the required employee contribution for coverage under an employer-sponsored health plan would exceed 8% (as indexed) of household income.

    • Effect of Opt-Out Payments. If an employer offers additional compensation to employees who decline coverage under the employer’s health plan (the IRS calls these “opt-out payments”), the amount of the available opt-out payment increases the employee’s required contribution when determining the plan’s affordability, regardless of whether the employee enrolls in the plan or receives the opt-out payment. The IRS views opt-out payments as economically equivalent to salary reductions (also treated as required employee contributions) because in each case the employee must forgo a specified dollar amount to participate in the plan. [EBIA Comment: The IRS’s position on opt-out payments was signaled in Notice 2015-87 (see our Checkpoint article), in which the IRS requested comments on this issue in anticipation of proposed regulations. Importantly, the proposed regulations would clarify that employer contributions to a cafeteria plan that may be used to purchase minimum essential coverage are not treated as opt-out payments even if employees waiving health coverage may receive them as cash. However, such contributions would not be treated as reducing the amount of the employee’s required contribution since they could be received as a taxable benefit.]
    • Limited Exception for Eligible Opt-Out Arrangements. A limited exception is proposed for payments available under “eligible opt-out arrangements.” These are arrangements under which opt-out payments are available only to employees who (1) decline employer-sponsored coverage, and (2) provide reasonable evidence that they and their expected tax dependents have or will have minimum essential coverage other than individual market coverage (e.g., under a spouse’s employer’s plan) during the plan year or other period covered by the opt-out arrangement. Generally, the employee’s attestation is considered reasonable evidence, unless the employer knows or has reason to know that the employee or a family member lacks other coverage. Evidence of coverage must be provided for each plan year to which the eligible opt-out arrangement applies, either at a reasonable interval before the coverage period starts (such as part of open enrollment) or after the plan year starts. Payments under eligible opt-out arrangements do not increase employees’ required contributions for affordability purposes for the full anticipated coverage period even if the alternative coverage terminates for the employee or any family member. While the IRS has not received comments about opt-out arrangements that impose meaningful conditions other than alternative coverage, it continues to invite comments on whether opt-out payments that are subject to other conditions should be addressed in future guidance. The IRS cautions against conditioning opt-out payments on enrollment in individual coverage since this type of arrangement could constitute an employer payment plan (see our Checkpoint article).
    • Effective Date. These provisions are proposed to be effective for plan years beginning on or after January 1, 2017. (Final regulations are anticipated before the end of 2016.) Until then, Notice 2015-87 provides that employers are not required to treat opt-out payments as increasing employees’ required contributions, so long as the opt-out arrangement was adopted before December 16, 2015. The preamble clarifies that employers participating in opt-out arrangements under collective bargaining agreements in effect before December 16, 2015 need not treat opt-out payments as increasing employees’ required contributions until the later of (1) the first plan year that begins following expiration of the collective bargaining agreement (disregarding any contract extensions on or after December 16, 2015), or (2) the applicability date of the regulations.
  • Annual Enrollment Opportunity. Employees are considered eligible for affordable, minimum value coverage under an employer-sponsored plan (and are ineligible for premium tax credits) if they have an annual opportunity to enroll. The proposed regulations clarify that, if employees decline coverage during an enrollment opportunity, they are considered eligible for the coverage only for the remainder of that plan year. If they are not given another opportunity to enroll at the end of the plan year, they are no longer considered eligible for the employer-sponsored plan and would be eligible for premium tax credits. The preamble reiterates that ALEs could be liable under Code § 4980H if they don’t offer employees an effective opportunity to enroll at least once per plan year (see our Checkpoint article).
  • Excepted Benefits. Because excepted benefits (e.g., most limited-scope dental or vision coverage) are not considered minimum essential coverage, employees would not lose eligibility for premium tax credits solely by virtue of enrollment in employer-sponsored excepted benefits. [EBIA Comment: Similarly, ALEs are not protected from Code § 4980H penalties solely by virtue of employees’ enrollment in excepted benefits.]

The proposed regulations also address a number of technical issues related to calculation of the amount of the premium tax credit, including partial months of coverage, determining the cost of the applicable silver-level benchmark plan (which may cap the amount of the premium tax credit) under various coverage scenarios, the effect of stand-alone policies for pediatric dental coverage, and responsibility for reconciling advance payments of premium tax credits.

EBIA Comment: ALEs that offer additional compensation to employees who waive health plan coverage will want to study the opt-out payment provisions carefully. Adding opt-out payments to employee required contributions may increase the probability that employer-sponsored coverage is not affordable, resulting in more employees being eligible for premium tax credits and exposing ALEs to potential Code § 4980H(b) penalties. Even if affordability under Code § 4980H is not a concern, the amount of the employee’s required contribution must be accurately reported on Form 1095-C. And eligible opt-out arrangements will require additional administrative checks. For more information, see EBIA’s Health Care Reform manual at Sections XXI (“Exchanges, Qualified Health Plans (QHPs), and CO-OPs”), XXVIII.E (“Assessable Payment (Penalty Tax) When Inadequate Coverage Offered to Full-Time Employees and Dependents (the “Subsection (b) Penalty”)”), and XXIX (“Shared Responsibility for Individuals (Individual Mandate)”). See also EBIA’s Form 1094/1095 Workbook at Section VIII.C (“Completing Form 1095-C”) and EBIA’s Cafeteria Plans manual at Section XII (“Contributions and Cash-Outs”).

Contributing Editors: EBIA Staff.