Due to the employer mandate under the Affordable Care Act (ACA), large employers with more than 50 full-time employees or full-time equivalent employees are required to offer medical coverage. However, it’s not necessarily a requirement for employees to purchase what the employer offers. In fact, employers are even allowed to provide incentives (compensation) to employees with the goal of enticing them to purchase their health insurance plan elsewhere and forgo the group health coverage policy entirely. This type of special compensation is referred to as an opt-out arrangement or cash in lieu of benefits waiver.
With opt-out arrangements, the goal is to reduce insurance costs for the employer while simultaneously offering more options to the employee. When done correctly, it’s a win/win for both parties. This page provides an overview of how opt-out arrangements work along with important things for employers to keep in mind.
Group Health Plan Opt-Out Arrangements
Determining ACA Affordability
Types of Opt-Out Payments
Other Employer Considerations
Action Steps
Group Health Plan Opt-Out Arrangements
Group health plan opt-out arrangements are allowed under the law, but if employers want to offer them, they should offer them to all employees. Selectively offering opt-out arrangements can put an employer at risk of discrimination in a variety of ways, such as violating the Health Insurance Portability and Accountability Act (HIPAA) nondiscrimination rules.
Determining ACA Affordability
The ACA states that employer healthcare plans must meet criteria for minimum value and affordability. In 2021, minimum affordability means the employee’s total contribution to the group health care plan must not exceed 9.83% of their annual household income.
The ACA employer affordability calculation complicates opt-out arrangements. In some cases, the opt-out payment must be added to the employee’s potential contribution and the sum of those two figures must still be considered affordable under the ACA. This is due to the fact that the employees who do not take advantage of the opt-out arrangement are technically both paying the employee premium and sacrificing the opt-out payment.
Types of Opt-Out Payments
The IRS allows employers to offer three different types of opt-out payments to their employees.
Unconditional Opt-Out Payments
An unconditional opt-out payment is the simplest of the three. In this type of arrangement, employees do not have to provide proof of coverage outside of the employer plan. They just have to decline the employer group health insurance before collecting their opt-out payment.
Conditional Opt-Out Payments
Conditional opt-out payments require employees to provide proof of alternative health insurance coverage before they can receive their payments. The alternative plan must be something other than an individual plan purchased from the Marketplace at healthcare.gov. The Marketplace is a health insurance shopping and enrollment service created by the Affordable Care Act in 2010 that offers plans for individuals and families.
Eligible Opt-Out Arrangements
An eligible opt-out arrangement is the only type of opt-out arrangement where the opt-out payment would not increase the employee’s cost of coverage. Because of this fact, the eligible opt-out payment would not need to be added into the ACA’s affordability calculator, making it an attractive option for employers who can handle the extra paperwork and administrative costs.
Two specific criteria must be met to be considered an eligible opt-out arrangement:
The opt-out payment can only be available to employees who decline enrollment in the employer group healthcare option for minimum essential coverage (MEC). Minimum essential coverage refers to any plan that meets the ACA’s criteria for adequate health coverage. Some examples of plans that do not meet the ACA’s criteria include:
Coverage limited to vision or dental
Plans that only cover specific diseases
Plans that only provide discounts on healthcare
The employee is also required to present evidence that they, along with their “expected tax family” (dependents and/or spouse), are covered or will be covered through a minimum essential coverage plan not found on the Marketplace (e.g. a spouse’s employer plan).
Other Employer Considerations
Although opt-out arrangements can save an employer a significant amount of money each year, there are certain things to keep in mind to avoid various potential financial penalties.
Medicare Secondary Payer (MSP)
If an employer is subject to Medicare Secondary Payer (MSP) rules, the employer is usually not allowed to offer opt-out financial incentives to employees or family members of employees who are on Medicare.
Liability to Taxation
Cash opt-out payments are usually taxable. To get around this fact and potentially make opt-out arrangements more attractive to employees, employers can offer opt-out arrangements through a Section 125 Plan.
HIPAA Nondiscrimination Rules
HIPAA nondiscrimination rules state that you may not discriminate based on health factors. In other words, you cannot offer an opt-out plan to one individual or another based on how healthy or unhealthy they are.
Opt-Out Payment as “Wages”
The Fair Standards Labor Act (FSLA) states that unless exempt, employers must pay at least 1.5x the base rate of pay when an employee works overtime (40 hours or more per week). In some cases, overtime calculations include opt-out payments, meaning that the employee works fewer hours before becoming eligible for an overtime rate of pay. As a result, employers who offer opt-out payments may end up needing to pay more overtime than employers who do not offer the option.
No Individual Policies
Due to HIPAA nondiscrimination rules and other regulations from different government organizations, employers must either offer opt-out arrangements to all employees or not offer them at all.
Action Steps
The following steps provide an overview of how an employer can start offering opt-out arrangements to their employees.
Offer the Opt-Out Arrangement Through a Section 125 Cafeteria Plan
With this particular type of plan, employees can choose from receiving either cash (taxable) or employee benefits (non-taxable). When employees choose to receive employee benefits, less taxable income means the employer is not required to pay for Social Security and Medicare for that portion of the employee’s taxable income.
Offer Opt-Out Incentives to All Eligible Employees
Be sure that all employees understand they are eligible to opt-out of the group health insurance policy to avoid potential problems down the line.
Fair Labor Standards Act (FLSA) Implication
Keep in mind that opt-out arrangement bonuses often count towards the amount of work that an employee performs. When offering opt-out arrangements, employers can easily forget about this fact and violate the FLSA by not paying an appropriate wage for overtime.
ALE “Eligible Opt-Out Arrangement” Verification
Employees must provide “reasonable evidence” to human resources that they and their expected tax family have or will have health plan coverage from a source other than the Marketplace. Employers must be sure to receive an attestation from the employee stating this. All records of attestation should be kept on file for documentation, but no further verification beyond attestation is required on the part of the employer.
Takeaway
Offering opt-out arrangements is a good way to give employees the freedom to choose while potentially saving on employer insurance costs at the same time. Before an employer can offer opt-out arrangements, they must understand the specifics of how to do it in order to receive the benefits without facing fines from regulatory bodies such as HIPAA. Before moving ahead with an opt-out program, seeking out legal advice to better understand state and federal laws and regulations is a good step in the process.
