Due to the employer mandate under the Affordable Care Act (ACA), large employers with more than 50 full-time or full-time equivalent employees must offer health coverage. however, it is not necessarily a requirement that employees purchase what the employer offers. In fact, employers may even provide incentives (compensation) to employees with the goal of enticing them to purchase their health insurance plan elsewhere and forego the group health coverage policy altogether. this type of special compensation is known as an opt-out agreement or cash in lieu of waiver of benefits.
With opt-out agreements, the goal is to reduce insurance costs for the employer while offering more choice to the employee. when done correctly, it’s a win/win for both parties. This page provides an overview of how opt-out agreements work along with important things employers should be aware of.
- group health plan opt-out agreements
- determining the affordability of here
- types of opt-out payments
- other employer considerations
- action steps
group health plan opt-out agreements
Group health plan opt-out arrangements are allowed by law, but if employers want to offer them, they must offer them to all employees. Offering selective exclusion agreements can put an employer at risk of discrimination in a variety of ways, such as violating the nondiscrimination rules of the Health Insurance Portability and Accountability Act (HIPAA).
determine affordability here
The aca states that employer health plans must meet minimum value and affordability criteria. in 2021, minimum affordability means the employee’s total contribution to the group health care plan must not exceed 9.83% of their annual household income.
Calculating employer affordability here complicates opt-out arrangements. In some cases, the opt-out payment must be added to the employee’s potential contribution, and the sum of those two figures must still be considered affordable under the ACA. This is due to the fact that employees who do not take advantage of the opt-out agreement technically pay the employee premium and forego the opt-out payment.
types of opt-out payments
The IRS allows employers to offer three different types of opt-out payments to their employees.
unconditional exclusion payments
An unconditional exclusion payment is the simplest of the three. In this type of arrangement, employees do not have to provide proof of coverage outside of the employer’s plan. they just have to decline employer group health insurance before collecting their opt-out payment.
conditional exclusion payments
Conditional exclusion payments require employees to provide proof of alternative health insurance coverage before they can receive their payments. the alternative plan must be different from an individual plan purchased in the marketplace at healthcare.gov. The Marketplace is a health insurance enrollment and purchase service created by the Affordable Care Act in 2010 that offers plans for individuals and families.
eligible exclusion agreements
An eligible exclusion agreement is the only type of exclusion agreement in which the exclusion payment would not increase the employee’s cost of coverage. Due to this fact, it would not be necessary to add the eligible exclusion payment in the ACA Affordability Calculator, making it an attractive option for employers who can handle the additional paperwork and administrative costs.
Two specific criteria must be met to be considered an eligible exclusion agreement:
- The exclusion payment may only be available to employees who decline enrollment in the employer group health care option for minimum essential coverage (MEC). minimum essential coverage refers to any plan that meets the aca’s criteria for adequate health coverage. some examples of plans that do not meet the aca criteria include:
- limited vision or dental coverage
- plans that only cover specific diseases
- plans that only offer health care discounts
- The employee is also required to submit evidence that he, along with his “expected tax family” (dependents and/or spouse), are covered or will be covered through a minimum essential coverage plan that is not in the marketplace (for example, a spouse’s employer plan).
other employer considerations
While exclusionary arrangements can save an employer a significant amount of money each year, there are certain things to keep in mind to avoid potential financial penalties.
medicare secondary payer (msp)
If an employer is subject to Medicare’s secondary payer (MSP) rules, an employer is generally not allowed to offer opt-out financial incentives to employees or family members of employees who have Medicare.
cash exclusion payments are generally taxable. To avoid this and potentially make opt-out agreements more attractive to employees, employers can offer opt-out agreements through a section 125 plan.
hipaa non-discrimination rules
hipaa’s non-discrimination rules state that you may not discriminate based on health factors. In other words, you cannot offer an opt-out plan to one person or another based on their health or ill health.
opt-out payment as “salary”
The Fair Standards Labor Act (FSLA) states that, unless exempt, employers must pay at least 1.5 times the base rate of pay when an employee works overtime (40 hours or more per week) . In some cases, overtime calculations include opt-out payments, meaning the employee works fewer hours before being eligible for an overtime pay rate. As a result, employers that offer opt-out payments may end up paying more overtime than employers that don’t offer the option.
no individual policies
Due to the anti-discrimination rules of HIPAA and other regulations of different government organizations, employers must offer exclusion agreements to all employees or not offer them at all.
The following steps provide an overview of how an employer can begin offering opt-out agreements to their employees.
Offering the opt-out agreement through a Section 125 cafeteria plan
With this particular plan type, employees can choose to receive cash (taxable) or employee benefits (nontaxable). When employees elect to receive employee benefits, less taxable income means the employer is not required to pay for social security and health insurance for that portion of the employee’s taxable income.
offer opt-out incentives to all eligible employees
Make sure all employees understand that they are eligible to opt out of the group health insurance policy to avoid potential problems down the road.
Implications of the
Fair Labor Standards Act (flsa)
Note that exclusion agreement bonuses typically count toward the amount of work an employee performs. By offering opt-out agreements, employers can easily forget this fact and violate the FLSA by failing to pay adequate wages for overtime.
ale “eligible exclusion agreement“
Employees must provide “reasonable evidence” to human resources that they and their expected tax family have or will have health plan coverage from a source other than the Marketplace. Employers should ensure they receive a certificate from the employee indicating this. all attestation records must be kept on file for documentation, but no additional verification beyond the employer’s attestation is required.
Offering opt-out agreements is a good way to give employees the freedom to choose while potentially saving on employer insurance costs. Before an employer can offer opt-out arrangements, they must understand the details of how to do so in order to receive benefits without facing fines from regulators like HIPAA. Before moving forward with an opt-out program, seeking legal advice to better understand state and federal laws and regulations is a good step in the process.