ACA affordability considerations

The IRS generally requires that cash opt-out payments be treated as employee contributions for purposes of determining if the plan is affordable under the Affordable Care Act. This applies to any employers subject to the ACA employer mandate. However, plans can avoid this if the employer only pays opt-out funds if certain conditions (a.k.a., the Limited Exception) are met. The requirements include:

The employee declines employer-sponsored major medical coverage.
The employee provides reasonable evidence that they and their expected tax dependents have, or will have during the plan year, other alternative, minimum essential coverage that is not individual market coverage.
Medicare Part A, TRICARE, Medicaid, CHIP, and other employer-sponsored coverage are considered "acceptable alternative coverage." (NOTE: Medicare and TRICARE mandate that many employers cannot incentivize workers who are eligible for those programs to drop active health coverage. Those rules should never be overlooked.)
An employee's attestation/affidavit is reasonable evidence by itself, unless the employer knows or has reason to know that the attestation/affidavit is wrong. An employer can also request other evidence.
Evidence/attestation of alternative coverage must be provided every plan year for which the eligible opt-out arrangement applies.
Evidence/attestation must be obtained at a reasonable time before the coverage period begins (e.g., during open enrollment) or after the plan year starts.
Employers may continue to exclude from affordability calculations opt-out payments for the entire plan year if the evidence/attestation was obtained at the beginning of the plan year – even if the employee or family members drop the alternative coverage mid-year.

These requirements potentially limit the amount that employers can use as part of an opt-out strategy. This is intentional so that employers couldn't use these payments to "push" employees to the individual markets, while also satisfying their obligations under the ACA. In our earlier example, if ABC Corp's opt-out program didn't qualify for the limited exception, its lowest cost coverage would cost $150 per month (the $100 cost of coverage, plus the $50 the employee forgoes by enrolling in coverage) for ACA affordability purposes.

Instant Insights /

Benefit opt-out programs: what you need to know

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