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Monday, 28 September 2015 13:56

A Potential Snag with Opt-Out Credits

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Large employers who offer an opt-out provision, where the employee “opts out” of the company’s benefits plan in exchange for cash or an increase in the employee’s salary, need to be aware of the impact this could potentially have when determining “affordability” under the employer mandate. 

In 2015, the employer mandate is in effect for large employers (defined as those with 100 or more full-time or full-time equivalent (FTE) employees), who must provide “minimum essential coverage (MEC)” to at least 70% of their full-time employees or potentially pay an assessment if they do not offer coverage, or if they offer coverage that isn’t “affordable”. 

Starting January 1, 2016, employers with 50 to 99 full-time employees or FTEs will be required to comply with the mandate as well.  

Although no guidance has been released with regard to an opt-out provision under the employer mandate, it has been suggested that it will most likely mimic the individual mandate’s calculation of affordability.


What are the IRS Guidelines for the Individual Mandate? 

An employee can be eligible for a tax credit on the individual exchange if their employer coverage is unaffordable, which is defined as the employee’s contribution towards coverage exceeding 9.5% of their income.  The amount they have to contribute to employer coverage also impacts whether they are subject to the individual mandate.  

An employee’s contribution is reduced by the amount the employer contributes, as long as the employee cannot elect to receive the employer contribution as a taxable benefit (such as cash). Therefore, employer opt-out contributions that can be taken as cash must be counted as employee contributions for affordability purposes under the individual mandate.


Potential impact of the affordability requirements under the Employer Mandate

An example:

  • An employer requires a $90 per month per employee contribution towards the cost of the plan.
  • This amount would almost certainly meet the affordability test for all employees. 
  • In addition, the employer offers all employees a $100 per month opt-out credit.
  • Based on how they interpret opt-out credits for the individual mandate, it appears the IRS may interpret the employee contribution to be $190 ($90 plus the $100 that the employee must forego to elect the coverage). 

Now, many of the employer’s lowest wage employees could fail the 9.5% affordability test, potentially subjecting the employer to a $3,000 affordability penalty for any of those employees who choose subsidized coverage on the exchange rather than the employer’s plan. Whether or not the coverage is affordable is communicated on each employee’s 1095 form starting in 2016.

Employers offering an opt-out provision should carefully review their benefits plan, and potentially check with legal counsel, to determine if the current arrangement violates the affordability requirements under the employer mandate. We also recommend outsourcing the preparation of your 1095 forms, to alleviate the time and compliance hassles associated with them. 

If you’d like to discuss the potential impact of your opt-out provision, just give us a call or This email address is being protected from spambots. You need JavaScript enabled to view it..  


Read 10518 times Last modified on Monday, 14 September 2020 20:05
Amy De Lorenzo

Amy Johnston is an Account Manager with extensive experience working with both large and small employers as a broker.  In addition to five years of broker experience prior to joining Fall River, she also brings eight years of insurance carrier expertise.  Amy is an expert on ERISA, the Affordable Care Act, and other compliance issues.

Ms. Johnston received a Bachelor of Arts degree in Communications from Colorado State University. She is a Colorado native from Steamboat Springs, and loves spending time in the mountains with her husband, two children, and Tucker the cocker spaniel. She enjoys snowshoeing, hiking, and philanthropy work to promote education.