This IRS has issued proposed regulations relating to health care reform’s premium tax credit and individual shared responsibility provision. These regulations include how the terms of employer sponsored coverage affects an employee’s eligibility for premium tax credits (PTC) and liability for individual shared responsibility. Although the proposed regulations focus on individuals, they have direct implications for Applicable Large Employers (ALE) who may be liable for a penalty under the Employer Mandate. 

Individuals are ineligible for a PTC if they're offered affordable, minimum value coverage under an employer sponsored group health plan. Importantly, the regulations reiterate that if the employer offers an opt-out payment, that amount may need to be taken into consideration when determining whether their plan meets the affordability safe harbors under the Employer Shared Responsibility mandate. 

There are two types of opt-outs: conditional, and unconditional. Unconditional opt-out payments are when an employee is paid a certain dollar amount for opting out of the group health plan they're offered and don't need to attest to having other coverage. In that scenario, an employer must take into consideration the opt-out amount when determining affordability. For example, if an employer pays a $20 per paycheck opt-out amount, and the coverage offered costs $100 per pay period for employee only coverage, the actual cost of coverage would be considered to be $120 per pay period. That total then needs to be reported on line 15 of the employee’s Form 1095-C. That will be the amount used by the Marketplace to determine whether or not the coverage offered to the individual is considered affordable. If the $120 per pay period puts the employee over the affordability percentage under the employer mandate, they may be considered eligible for a PTC, as that coverage will no longer be considered affordable. Subsequently, the employer will then be liable for the Part B penalty for that individual.

A conditional opt-out payment is one that only pays an employee the opt-out amount if they attest that they have coverage for themselves and their spouse and dependents (if any) under another group health plan. Conditional opt-out payments don't need to be added when determining whether or not coverage is considered affordable under the employer mandate. 

Effective Date

Employers who had an unconditional opt-out arrangement in place prior to December 16, 2015 will need to comply with this rule upon their first renewal in 2017. Employers who implemented an unconditional opt-out provision effective after December 16, 2015 are subject to this provision in 2016. 

For employers needing an attestation form for opt-out payments, please see your Assurance representative. 

Information contained herein is not intended to constitute tax or legal advice and should not be used for purposes of evading or avoiding otherwise applicable regulatory responsibilities as issued by the federal or state government(s) and/or taxes owed under the Internal Revenue Code. You are encouraged to seek advice from your legal or tax advisor based on your circumstances.