IRS Proposes Regulations on Group Health Benefit Opt-Out Payments

Author: Alice Gilman

July 14, 2016

The IRS has issued proposed regulations that confirm the position it took in Notice 2015-87 with regard to unconditional opt-out payments - payments made to employees who forgo group health benefits and increase the amount of their monthly premium by the amount of the payments. The proposed regulations, which also cover eligible conditional opt-out payments, would take effect for plan years beginning in 2017. The IRS anticipates issuing final regulations before the end of 2016.

Unconditional and eligible conditional opt-out payments

Cafeteria plans must allow an employee a choice between a qualified benefit, such as group health insurance, and a taxable benefit, such as cash. The proposed regulations make clear that the choice between receiving unconditional and eligible conditional opt-out payments is not the same as the choice between receiving group health benefits and cash pursuant to a cafeteria plan election. Cafeteria plans, therefore, may continue to offer an employee the choice between an employer contribution for group health benefits or cash without running afoul of the proposed regulations.

Under IRS Notice 2015-87 and these proposed regulations, an unconditional opt-out payment is a payment of additional compensation that is conditioned solely on an employee declining an employer's offer of group coverage; the employee is not required to satisfy any other meaningful condition to receive the payment. Unless transition relief applies, these payments must be included in the amount the employee pays as a monthly premium for group health benefits, regardless of whether the employee enrolls in the coverage, or declines to enroll in the coverage and is paid the opt-out payment.

If the recalculated amount results in group benefits being unaffordable, the employer could be liable for an employer shared responsibility payment. The recalculated amount must also be reported on Form 1095-C.

Under the proposed regulations, eligible conditional opt-out payments - payments of additional compensation that are conditioned on an employee declining coverage and satisfying additional meaningful requirements - would not need to be added into the employee's monthly premium payment. Eligible conditional opt-out arrangements would be required to satisfy all of the following conditions:

  • The employee would be required to provide reasonable evidence that he or she, and all the individuals for whom the employee reasonably expects to claim as tax dependents (i.e., the employee's tax family), has other group coverage, such as spousal or parental coverage, during that plan year. Reasonable evidence can include the employee's attestation of alternative group coverage;
  • The employee would not be eligible to receive an opt-out payment if the employer knows or has reason to know that the employee or family member does not, or will not, have the required alternative coverage; and
  • The eligible opt-out arrangement would require the employee to present this reasonable evidence at least annually before the next plan year commences (e.g., during the plan's open enrollment period), although the proposed regulations would also allow the employee to present this reasonable evidence after the plan year starts.

If the employee or a family member's alternative group coverage terminates during the plan year, the employer could continue to exclude eligible opt-out payments from the employee's monthly premium payment for the remainder of the plan year.

Transition relief

Notice 2015-87 provided transition relief to an employer that adopted an unconditional opt-out arrangement before December 16, 2015, and extended that relief until the IRS issues final regulations. In general, this transition relief provides that an employer with an opt-out arrangement in effect prior to December 16, 2015, does not need to increase the employee's monthly premium by the amount of the opt-out payment. In addition, the opt-out payment will not be considered in determining whether the employer is liable for an employer shared responsibility payment for offering unaffordable group health insurance.

For plan years beginning before January, 1, 2017, the employee, however, may consider his or her monthly premium payment for group health benefits increased by the amount of an unconditional or conditional opt-out payment. The employee, therefore, may be able to qualify for an advance premium health tax credit if he or she buys individual health insurance through the marketplace.

The proposed regulations confirm the transition relief offered in Notice 2015-87 and would extend it through the end of the most recent plan year beginning before January 1, 2017. The regulations would also extend identical transition relief to opt-out arrangements under collective bargaining agreements that are in effect on December 16, 2015.

Comments requested

The IRS is seeking public comments on the following aspects of eligible opt-out arrangements:

  • Whether there are other workable rules, in addition to, or in replacement for, opt-out payments, which would more accurately reflect an employee's cost of coverage while minimizing undesirable consequences and incentives; and
  • Whether additional requirements should be imposed on eligible conditional opt-out arrangements.

Comments are due to the IRS by September 6, 2016. Comments may be mailed to CC:PA:LPD:PR (REG-109086-15), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

Comments also may be submitted electronically to the Federal eRulemaking Portal (REG-109086-15).