IRS Notice 2015-87 Could Spell Big Changes for Employer-Sponsored Coverage in 2017

IRS Notice 2015-87 Could Spell Big Changes for Employer-Sponsored Coverage in 2017

On December 16, 2015, the Internal Revenue Service (IRS) issued Notice 2015-87 (“Notice”) to address how certain provisions under the Affordable Care Act (ACA) apply to employer-provided health coverage.  The notice covers a broad array of topics, including the ACA’s market reforms as well as the employer shared responsibility rules and related reporting requirements.  Perhaps most importantly, the Notice addresses how employer flex credits and opt-out payments impact affordability calculations under the ACA’s Employer Shared Responsibility provisions (“Pay-or-Play”).

 

Background

Under Pay-or-Play, in order to avoid excise tax penalties, Applicable Large Employers (e.g. employers with 50 or more full-time employees including full-time equivalents) are required to offer full-time employees health insurance coverage that provides 1.) minimum value, and 2.) is affordable.  Generally, in 2015, if an employee was required to contribute less than 9.56% of his or her wages towards the lowest-cost, single-coverage-only plan that provides minimum value, the plan was affordable (in 2016, the affordability threshold is 9.66% of wages).  If an Applicable Large Employer offers unaffordable minimum value single-coverage to full-time employees, it will be subject to excise tax penalties for full-time employees receiving a premium tax credit through a Health Insurance Marketplace (e.g. healthcare.gov).

 

Employer Flex Plans

Many employers offer “Flex Plans” where employees are provided with a set employer contribution (i.e. $400 per month) which the employee can then allocate towards benefits as he or she sees fit.  The Notice clarifies that Applicable Large Employer contributions within a flex plan will only be considered as an employer contribution for determining affordability under Pay-or-Play if the flex dollars can only be used for health spending.  If the flex credits can be used for non-health spending (e.g. benefits that are not considered “medical care” benefits under 26 U.S. Code § 213), they will not reduce the employee’s monthly contribution towards health insurance for the sake of calculating affordability under Pay-or-Play.

This means that if an Applicable Large Employer offers a flex contribution that is available to pay for health care as well as non-health care benefits (such as dependent care or group term life insurance), the contribution will not reduce the required employee contribution towards major medical coverage when calculating affordability under Pay-or-Play.  Assume, for example, an employer offers a flex credit of $400 per month that can be used on both health care and non-health care benefits, and the total monthly premium for minimum value single-coverage is $500 per month.  Even if an employee elects to allocate the entire $400 towards the minimum value, single-coverage plan, the IRS will conclude when assessing affordability under Pay-or-Play that the employee’s monthly cost of minimum value, single-coverage is $500 (not $100 per month) because the employee could have allocated a portion of the $400 towards non-health care benefits.

Transition Relief for Non-Health Flex Plans

Solely for calculating affordability under Pay-or-Play for plan years beginning before January 1, 2017, an Applicable Large Employer’s flex contribution that is not a health flex plan because it may be used for non-health benefits, but may be used by the employee towards the amount the employee is otherwise required to pay for the health coverage, will be treated as reducing the amount of an employee’s required contribution.  This relief is only available to flex contribution arrangements offering non-health benefits that were adopted on or before December 16, 2015. 

Opt-Out Payments

In order to incentivize waivers, many employers offer opt-out payments to employees who waive coverage.  The Notice further clarifies that for Pay-or-Play affordability calculations, Applicable Large Employers offering unconditional opt-out payments (e.g. cash incentives for waiving coverage)may have the effect of increasing an employee’s contribution for health coverage beyond the amount of any salary reduction contribution.  According to the Notice’s example:

“[If] an employer offers employees group health coverage through a §125 cafeteria plan, requiring employees who elect minimum value, self-only coverage to contribute $200 per month toward the cost of that coverage, and offers an additional $100 per month in taxable wages to each employee who declines the coverage (e.g. opt-out payment), the offer of $100 in additional compensation has the economic effect of increasing the employee’s contribution for coverage.  In this case, the employee contribution for the group health plan effectively would be $300 ($200 + $100) per month, because an employee electing coverage under the health plan must forgo $100 per month in compensation in addition to the $200 per month in salary reduction.”

The IRS indicated that it will consider whether conditional opt-out payments—where receipt of the opt-out payment is not solely conditioned on the employee declining employer-sponsored coverage but also satisfaction of additional conditions (such as the employee providing proof of having coverage provided by a spouse’s employer or other coverage)—should be treated differently than unconditional opt-outs.  The IRS will publish a rule addressing this issue.

Transition Relief for Opt-Out Payments

If an Applicable Large Employer adopted an opt-out payment plan on or before December 16, 2016, it will not be required to increase the amount of an employee’s required contribution by the amount of the opt-out payment when calculating affordability under Pay-or-Play for plan years beginning  before January 1, 2017.

To read more about the Notice (including guidance pertaining to Health Reimbursement Arrangements, COBRA, affordability calculations, etc. not covered in this article ), please click here.

If you have questions regarding the Notice, please contact your dedicated Kistler Tiffany Benefits’ Employee Benefits Consultant.

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