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IRS Addresses Impact of Employer Flex Contributions and Opt-Out Payment on Affordability; Transition Relief Announced

Employers offering flex contributions under an arrangement that include the choice to receive contributions as taxable cash or to use contributions to pay for non-health benefits, as well as employers that offer opt-out payment to employees who decline major medical coverage will want to pay close attention to newly released IRS guidance. IRS Notice 2015-87, released December 17, 2015, disallows application of these types of payment arrangements towards an employee’s “required contribution” for purposes of assessing the affordability of employer sponsored coverage. Unless contributions meet specified guidelines, the employer may not receive credit when the IRS calculates affordability, which could impact an employer’s potential penalties under the ACA’s Employer Mandate. The Notice does include transition relief which will delay enforcement of the new rules for most plan years beginning prior to January 1, 2017.  Employers are advised to review Notice 2015-87 to confirm their eligibility for transition relief, and to consult with tax or legal counsel as necessary.

Treatment of Employer Flex Contributions:

Under the new guidance, any of the following circumstances mean that the employer will not receive credit for the flex contribution when calculating affordability:

  • The employee can choose to receive cash instead of purchasing benefits OR
  • The employee is not permitted to apply the contribution toward the cost of ACA qualifying employer sponsored coverage (“minimum essential coverage”) OR
  • The employee can use the contribution to pay for non-health care benefits such as dependent care or life insurance

For plan years beginning before January 1, 2017, if the amount of the flex contribution is available to the employee to pay for health coverage, it will count toward reducing the employee’s required contribution as long as the employer qualifies for the transition relief. To qualify, the contribution arrangement has to have already been in place prior to the release of the Notice—relief is not available to a flex contribution arrangement offering non-health benefits that is adopted after December 16, 2015. Employers wishing to utilize transition relief should take care not to substantially increase the amount of the flex credit offered to employees, as a substantial increase to the amount of the flex contributions that occurs after December 16, 2015 will make the employer ineligible for the relief.

Treatment of Opt-Out Payment:
The following types of opt-out payment must be added to the premium paid by the employee when calculating the employee’s required contribution:

  • The amount cannot be used to pay for coverage under the employer’s plan AND
  • The amount is available only if the employee declines coverage

Until future guidance is released, and at minimum for plan year beginning before January 1, 2017, employers are not required to increase the amount of an employee’s required contribution by the amount of an opt-out payment, and an opt-out payment will not be treated as increasing an employee’s required contribution for purposes of penalties under the Employer Mandate. The opt-out arrangement must have been adopted by December 16, 2015. Opt-out arrangements adopted after December 16, 2015 are not eligible for the transition relief.

A more detailed explanation of the recent Notice is available here.

For additional information on the IRS Reporting under ACA or other Patient Protection and Affordable Care Act requirements, please visit www.HCReducation.com.

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