Opt-Out Incentives and ACA Affordability

Posted August 12, 2016 Industry Insights, Expert Tips, Company News



The IRS has issued proposed regulations on how health coverage opt-out payments, also referred to as opt-out incentives, affect health reform’s premium affordability requirements. These proposed regulations follow information the IRS has previously issued indicating that unconditional opt-out payments must be factored into the Play or Pay affordability equation, but conditional opt-out payments are not. So what does this mean?

General Rule for Opt-out Incentives

For purposes of determining whether an employee’s single-only health coverage contribution is affordable, the single-only premium contribution plus the opt-out incentive payment must be deemed affordable. This arrangement contains no stipulation that the employee provide evidence of other employer sponsored coverage.

Sample calculation of unconditional opt-out payment:

Employee Monthly Single-Only Health Premium Contribution: $110.00
Monthly Opt-out incentive added: +$100.00
Total Monthly Premium that must be affordable: $210.00
Exception to the General Rule – Conditional Opt-out Incentives

The proposed regulations provide an exception to the general rule when the opt-out incentive is conditioned upon the employee providing proof of other group health coverage. This “conditional opt-out payment” can be excluded from the affordability calculation when the following requirements are met:

The employee:

  • Is declining coverage in the employer’s group health plan;
  • Provides reasonable evidence that the employee and the employee’s “expected tax family” have, or will have, alternative minimum essential coverage (MEC) through another group health plan.

Sample calculation of conditional opt-out payment:

Employee Monthly Single-Only Health Premium Contribution: $110.00
Conditional Opt-out incentive is not added: +$ 0.00
Total Monthly Premium that must be affordable: $110.00

For the exception to apply, the alternative MEC must be group health coverage and not individual coverage. According to the IRS, reasonable evidence includes attestation the employee, along with the employee’s expected tax family, has or will have minimum essential coverage.

Effective Date

The proposed regulations are to become effective on the first day of the first plan year beginning on or after January 1, 2017. Please request additional information from your HBI consultant or analyst if you have more questions.

Please note that the information contained in this document is designed to provide authoritative and accurate information, in regard to the subject matter covered. However, it is not provided as legal or tax advice and no representation is made as to the sufficiency for your specific company’s needs. This document should be reviewed by your legal counsel or tax consultant before use.

Additionally, the messages and content within the Pittsburgh Health Care Reform group do not reflect the advisory services of Henderson Brothers, Inc.