IRS Proposes New Rules Making Health Coverage Opt-out Arrangements More Difficult

The IRS has proposed new regulations that add another layer of complication to any employer that offers or is considering offering the option of cash in lieu of payment to employees that decline employer-sponsored health coverage.
Already, any employer offering to pay employees who decline coverage has to walk a fine line and clearly state that the cash in lieu of payment is not to be used to purchase coverage elsewhere.
As a result of these newly proposed rules, employers that are still offering cash in lieu of coverage may want to reconsider doing so because if they make a mistake they could be subject to the biggest fine available under the Affordable Care Act: $36,500 ($100 for each day) per employee.
Under the proposed rules, employers that offer an unconditional cash-in-lieu option would be required to add the payment to what the employee would have been required to pay for coverage (had they elected to take it) in order to calculate if the plan is affordable under the ACA.
For an employer’s health plan to pass the ACA’s “affordability test,” it must cost the employee no more than 9.5% of their W-2 salary.
You should note that the opt-out arrangement must be completely unconditional and should in no way be tied to requiring proof of alternative coverage, such as through an exchange or a spouse’s employer-sponsored health plan.
There is one caveat under the new rules, though: the employer would be exempt from adding the cash in lieu of payment to the employee’s expected contribution if the employee can show proof that they have secured insurance that covers the “minimum essential coverage” standard under the ACA.
The employee would have to show reasonable evidence that they are insured. Under the proposed rules, sufficient evidence would be an employee’s affidavit that they have coverage or soon will have it.
The evidence must be provided in a timely manner, like during open enrollment, and must be provided annually, under the proposed rules.
Employers that still want to offer cash to employees that reject employer-sponsored coverage should carefully study the regulations, so that they can structure the arrangement in a manner that reduces the risk of being assessed penalties.