Some employers, particularly school districts, provide an incentive to employees who “opt-out” of the employer’s group medical plan. This incentive usually takes the form of additional taxable cash compensation or pre-tax employer contributions to a Section 125 (Cafeteria ) plan. Recent IRS guidance effective beginning in 2014 has placed limits on how such arrangements must be structured in order to comply with the Affordable Care Act (ACA).
Can I provide an “opt-out” incentive to encourage employees to waive major medical coverage?
Yes, but only as a feature of your Section 125 plan. If the opt-out incentive is not part of the Section 125 plan, the benefits provided to those employees who do not opt-out of coverage will be deemed to be taxable income.
How does the recent IRS guidance affect an employer who provides a cash incentive for opting out of coverage?
Any part of the incentive that is used to purchase benefits as part of the Section 125 plan are considered to be employee salary reduction contributions and NOT employer contributions. Therefore the IRS guidance on employer contributions does not apply.
School districts and other government entities that are subject to IPERS should be cautioned when providing a cash out option. IPERS treats incentive amounts that may be cashed out as IPERS covered wages even if the employee elects to take non-taxable benefits, unless an exception applies. For example, if the Section 125 plan document permits a cash out option only if the employee provides proof of other major medical coverage (duel coverage), then the amount of the cash incentive equal to the premium that the employee would have been required to pay will not be considered IPERS covered wages.
NOTE: Incentive amounts that are not subject to a cash out option are generally NOT IPERS covered wages.
How does the recent IRS guidance affect incentives for which a cash out option is not provided?
If a cash out option is not provided, the amount of employer contributions that can be used to purchase Health FSA benefits must be limited to the greater of the amount of employee contributions or $500.
An employer agrees to provide a $250 per month incentive ($3,000 per year) to any employee who waives coverage and provides proof of other major medical coverage. The incentive is paid as additional cash compensation.
The entire $3,000 is treated as taxable compensation to the employee. (If the employee would have been required to pay all or part of the premium for the employer’s coverage had the employee not opted out, the part of the cash compensation equal to the required premium is not IPERS covered wages.)
The employee can elect to use all or any part of the $3,000 amount to purchase any Section 125 plan benefit. All of the benefits will be treated as having been purchased with employee compensation. (NOTE: The amount of Health FSA benefit that can be purchased with employee salary reductions is limited to $2,500 for 2014.)
An employer provides $250 per month incentive ($3,000 per year) to any employee who waives coverage and provides proof of other major medical coverage. The employer does NOT provide a cash-out option.
None of the $3,000 is treated as taxable compensation to the employee, and if the employer is subject to IPERS, none of the $3,000 will be covered wages for IPERS purposes.
The amount of Health FSA benefit that can be purchased with the $3,000 must be limited to the greater of $500 or 100% of the Health FSA benefit purchased through employee salary reductions. (For example, an employee who makes a $2,000 salary reduction will receive an addition $2,000 in employer amounts for a total of $4,000 in Health FSA benefits.)
Does providing an opt-out incentive affect my potential liability under the ACA “Play-or-Pay” rules?
If the offered coverage meets both ACA Minimum Value and Affordability standards, the offer of coverage will relieve the employer from “Play-or-Pay” penalty liability under the ACA even if the employee declines the coverage.
This review represents the opinion of Advantage Administrators on the interaction of insurance opt-out programs, Section 125 and IPERS based on guidance available on the date that this review was published. This review is not intended to be legal, accounting or other professional advice. Advantage Administrators assumes no liability whatsoever in connection with the use of these comments, nor are these comments directed to the situations of specific employers.