The IRS has issued proposed regulations (REG-109086-15) on the premium tax credit that, among other things help explain how an employer could use an opt-out arrangement and not increase their potential liability for a shared responsibility payment under IRC §4980H.
While these regulations are not scheduled to be effective until years beginning after December 31, 2016, taxpayers may rely on them for years beginning after December 31, 2015 (or, in most cases, calendar year 2016).
The opt-out arrangement provisions will help employers who wish to provide “opt-out” options to employees with guidance on how to design the program. The IRS had initially provided information on such programs in Notice 2015-87. One key issue involves the IRS’s position that providing an employee with an option to receive cash in lieu of employer provided coverage represents part of the cost of coverage for the employee when computing whether affordable coverage had been offered.
As the IRS noted:
Because forgoing an unconditional opt-out payment is economically equivalent to forgoing salary pursuant to a salary reduction election, and because §§ 1.36B-2(c)(3)(v) and 1.5000A-3(e)(3)(ii)(A) provide that the employee's required contribution includes the amount of any salary reduction, the proposed regulations adopt the approach described in Notice 2015-87 for opt-out payments made available under unconditional opt-out arrangements and provide that the amount of an opt-out payment made available to the employee under an unconditional opt-out arrangement increases the employee's required contribution.
However, the IRS does provide for a limited exception for certain arrangements under pre-existing collective bargaining agreements. As the IRS explains in the preamble:
Some commenters requested clarification that an unconditional opt-out arrangement that is required under the terms of a collective bargaining agreement in effect before December 16, 2015, should be treated as having been adopted prior to December 16, 2015, and that amounts made available under such an opt-out arrangement should not be included in an employee's required contribution for purposes of sections 4980H(b) or 6056 through the expiration of the collective bargaining agreement that provides for the opt-out arrangement. The Treasury Department and the IRS now clarify that, under Notice 2015-87, for purposes of sections 4980H(b) and 6056, an unconditional opt-out arrangement that is required under the terms of a collective bargaining agreement in effect before December 16, 2015, will be treated as having been adopted prior to December 16, 2015. In addition, until the later of (1) the beginning of the first plan year that begins following the expiration of the collective bargaining agreement in effect before December 16, 2015 (disregarding any extensions on or after December 16, 2015), or (2) the applicability date of these regulations with respect to sections 4980H and 6056, employers participating in the collective bargaining agreement are not required to increase the amount of an employee's required contribution by amounts made available under such an opt-out arrangement for purposes of sections 4980H(b) or 6056 (Form 1095-C). The Treasury Department and the IRS further adopt these commenters' request that this treatment apply to any successor employer adopting the opt-out arrangement before the expiration of the collective bargaining agreement in effect before December 16, 2015 (disregarding any extensions on or after December 16, 2015).
The IRS also creates a carve-out from counting opt-out amounts as required employee contributions for plans that require an employee to demonstrate the he/she is covered under another plan (say that of a spouse), assuming the employer confirms that status. As the preambles describes this proposed rule:
In an effort to provide a workable rule that balances these competing concerns, the proposed regulations provide that amounts made available under conditional opt-out arrangements are disregarded in determining the required contribution if the arrangement satisfies certain conditions (an "eligible opt-out arrangement"), but otherwise the amounts are taken into account. The proposed regulations define an "eligible opt-out arrangement" as an arrangement under which the employee's right to receive the opt-out payment is conditioned on (1) the employee declining to enroll in the employer-sponsored coverage and (2) the employee providing reasonable evidence that the employee and all other individuals for whom the employee reasonably expects to claim a personal exemption deduction for the taxable year or years that begin or end in or with the employer's plan year to which the opt-out arrangement applies (employee's expected tax family) have or will have minimum essential coverage (other than coverage in the individual market, whether or not obtained through the Marketplace) during the period of coverage to which the opt-out arrangement applies. For example, if an employee's expected tax family consists of the employee, the employee's spouse, and two children, the employee would meet this requirement by providing reasonable evidence that the employee, the employee's spouse, and the two children, will have coverage under the group health plan of the spouse's employer for the period to which the opt-out arrangement applies.
Note that the employer needs evidence of coverage that was not obtained from the individual market to take advantage of this provision. But doing so may significantly reduce the employer’s exposure to a shared responsibility payment.
The preamble describes the nature of acceptable evidence as follows:
For purposes of the proposed eligible opt-out arrangement rule, reasonable evidence of alternative coverage includes the employee's attestation that the employee and all other members of the employee's expected tax family, if any, have or will have minimum essential coverage (other than coverage in the individual market, whether or not obtained through the Marketplace) or other reasonable evidence. Notwithstanding the evidence of alternative coverage required under the arrangement, to qualify as an eligible opt-out arrangement, the arrangement must also provide that any opt-out payment will not be made (and the payment must not in fact be made) if the employer knows or has reason to know that the employee or any other member of the employee's expected tax family does not have (or will not have) the required alternative coverage. An eligible opt-out arrangement must also require that the evidence of coverage be provided no less frequently than every plan year to which the eligible opt-out arrangement applies, and that the evidence be provided no earlier than a reasonable period before the commencement of the period of coverage to which the eligible opt-out arrangement applies. Obtaining the reasonable evidence (such as an attestation) as part of the regular annual open enrollment period that occurs within a few months before the commencement of the next plan year of employer-sponsored coverage meets this reasonable period requirement. Alternatively, the eligible opt-out arrangement would be permitted to require evidence of alternative coverage to be provided later, such as after the plan year starts, which would enable the employer to require evidence that the employee and other members of the employee's expected tax family have already obtained the alternative coverage.
Some of the other key provisions in the regulations include:
- Elimination of the normal waiver for a taxpayer that ends up with income below 100% of the federal poverty level or with eligibility for Medicaid or CHIP if the person, with intentional or reckless disregard of the facts, gave the Exchange erroneous information for making such a determination;
- Special rules for individuals who successfully appeal a determination by the Exchange they are not eligible for advance credit payments and retroactively enroll in coverage;
- Rules related to a benchmark plan premium and
- Information reporting provisions.