Let’s start with the Pros:
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Extra cash in the waiving employees’ pockets;
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Potential savings for the employer since the opt-out payment is usually designed to be less than the employer contribution to the health insurance plan;
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Employees who enroll in coverage generally receive greater total rewards than those who waive, and offering an opt-out payment may have the feeling of leveling the playing field; and
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An employer looking to manage costs while maintaining benchmark-level benefits may see significant value in an opt-out payment.
Cons/considerations:
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Additional administrative burden for the employer;
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Additional taxable income for the employee (see below);
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Some employers might have an objective of influencing employees to waive the employer health plan (this is not advised);
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An employer who values their market-leading benefits may not want to encourage employees to opt-out in any way;
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An opt-out payment may encourage healthy individuals to drop coverage, leaving the employer with a pool of employees who may incur high-dollar claims; and
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The employer may feel that they will just be rewarding employees who would waive the coverage either way.
If an employer decides to proceed with offering an opt-out program, there are several items to be aware of:
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The opt-out payment should be less than the employer contribution to the health plan. This way the employer has less chance of being seen as encouraging employees to waive the health plan, which could risk an ERISA violation;
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Opt-out payments must be made on a post-tax basis and will result in taxable income (unless offered through a Cafeteria Plan). Also, the payments may need to be included as “wages” under the Fair Labor Standards ACT (FLSA) for the purposes of overtime payments, based on a recent court decision;
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An opt-out arrangement for Medicare-eligible employees could violate the Medicare Secondary Payer rules, depending on how that is set up;
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ALL benefit-eligible employees should be offered the opt-out payment. Under no circumstances should an employee be carved in or left out of the payment due to health status or claims, as this would violate HIPAA nondiscrimination rules and Privacy rules;
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Employers requiring proof of other coverage should generally not accept individual policies as proof, as there are rules designed to avoid employers dumping their employees onto the individual exchanges;
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For Applicable Large Employers (ALEs) only, employers may need to count their opt-out credit as part of the employee contributions in the ACA “affordability” calculation. The theory behind this I is that employees not only need to pay their contribution but also need to forego an opt out credit in order to enroll, and thus this is the true “cost” of the coverage. This may make it more difficult for the employer to pass the “affordability” test. There are new rules spelling out the rules of “eligible Opt Out Credits” that don’t impact the affordability test. These rules are complex and beyond the scope of this article but this excellent legal blog explains them well (Leavitt Group).
After weighing the pros, cons, and considerations, employers should always examine their overall objective and motivation behind implementing an opt-out payment. A further suggestion is to consult with the health insurance company to confirm that such an arrangement complies with the insurance contracts, and with your tax advisor to understand how your structure affects your compliance with the ACA and other laws. The employer’s enrollment materials and ERISA Plan Documents should also be updated to reflect the opt-out provisions. While Fall River cannot give legal advice on this topic, we can help you determine whether this is a good fit for your business. Contact us to learn more.
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