New IRS Guidance: Opt-Out Arrangement Rules To Be Finalized ‘At a Later Time’

Employers May Continue to Rely on Prior Guidance

Prior guidance addressed how opt-out arrangements—an arrangement whereby an employer offers its employees a cash payment in exchange for declining coverage under an employer-sponsored plan—are to be taken into account for purposes of determining whether an employer-sponsored group health plan offers affordable coverage. While the IRS anticipated finalizing this guidance prior to the end of 2016, the IRS announced in a recent final rule that it expects to finalize such guidance “at a later time.” In the interim, employers can rely on the opt-out arrangement guidance provided in IRS Notice 2015-87 and a recent proposed rule.

Key Definitions
The following definitions are key to understanding the IRS’s current guidance on opt-out arrangements:

• Unconditional opt-out arrangements: Arrangements providing payments conditioned solely on an employee declining coverage under employer-sponsored coverage and not on an employee satisfying any other meaningful requirement related to the provision of health care to employees, such as a requirement to provide proof of coverage through a plan of a spouse’s employer.
• Non-relief-eligible opt-out arrangement: An unconditional opt-out arrangement adopted after December 16, 2015. An opt-out arrangement will be treated as adopted after December 16, 2015 unless:
  • The employer offered the opt-out arrangement (or a substantially similar opt-out arrangement) with respect to health coverage provided for a plan year including December 16, 2015;
  • A board, committee, or similar body or an authorized officer of the employer specifically adopted the opt-out arrangement before December 16, 2015; or
  • The employer had provided written communications to employees on or before December 16, 2015 indicating that the opt-out arrangement would be offered to employees at some time in the future.

Latest Opt-Out Arrangement Guidance
The IRS has stated that until final regulations on opt-out arrangements are applicable, employers can rely on the opt-out arrangement guidance provided in IRS Notice 2015-87 and a recent proposed rule. That guidance generally provides that, for purposes of pay or play and the corresponding information reporting provisions, employers are not required to increase an employee’s required contribution by the amount of an opt-out payment as long as payment was not made as part of a non-relief-eligible opt-out arrangement.

Opt-Out Arrangements and Individual Health Insurance Policies
As a reminder, the proposed rule provided that if an opt-out payment is conditioned on an employee obtaining individual market coverage, that opt-out arrangement could operate as an impermissible employer payment plan that may be subject to a $100 per day excise tax per applicable employee ($36,500 per year, per employee) under the federal tax code.