Health Plan Opt-outs and ACA Affordability - URGENT MATTER FOR HEALTH PLANS WITH A JANUARY 1, 2015 EMPLOYER MANDATE EFFECTIVE DATE

On Friday, the regulators issued new regulations that have been interpreted to provide that amounts paid by employers to employees who opt-out of the employer’s health plan must be treated as additional employee contributions for purposes of the affordability component of the ACA’s employer mandate rules.

This position is a radical departure from conventional notions of “employee cost,” and therefore it is unlikely that employers with these arrangements have considered the cash-out amount available to employees who waive coverage as part of the cost calculation for employees who do not waive coverage. Nevertheless, this apparently is the position the regulators plan to take starting on January 1, 2015 when the affordability rules generally become effective. (These rules are also applicable to many arrangements where the employer makes available consideration (e.g., “benefits credits”) other than cash to employees who waive health plan coverage.)

Although the text of the regulations is truly a singular model of non-clarity, the current consensus is that the meaning of the convoluted text is best illustrated by the following example:

• An employee's required contribution for individual coverage under the employer's health plan is $90 per month.
• The employer offers a cash opt-out payment of $50 per month to the employee if health plan coverage is declined.
• The “cost” to the employee for purposes of determining ACA affordability is $140 (not $90).

Employers that offer payments (or credits) for opting-out of health coverage should determine – sufficiently in advance of the effective date for their plan of the ACA affordability rules – the steps they should take to respond to these regulations and avoid ACA employer mandate penalties.

Employers that maintain a “no benefits” employment category also need to pay immediate attention to this development. (A “no benefits” practice is one where the primary distinction between an employee in one class of employee (a “benefits” category) and another (the employer’s standard employment category) is that the latter gets more salary and no benefits and the former gets less salary but also receives benefits, all other aspects of employment being equal.) These arrangements – and arrangements where government contractor employees are paid their “fringe rate” in cash -- are particularly impacted by the new regulations.

Of course, this development should receive the immediate attention of employers to which the ACA affordability requirements become effective on January 1, 2015. Please let us know if you have any question on this latest ACA surprise from the regulators.