IRS Confirms That Your "Opt-Out" or "Cash-in-Lieu" Program Must be Added to Employee Contributions

On December 16th in Notice 2015-87 the IRS confirmed what we knew to be their most likely interpretation of employer "opt-out" or "cash-in-lieu" provisions: opt-out dollars must be added to an employee's contribution amount in determining compliance with PPACA's affordability standards.  Over the year's we've addressed this issue here and here.  This IRS Notice provides clarification on the issue.

Question Presented

How are employer payments that are available only if an employee declines coverage under an eligible employer-sponsored plan (opt-outs or cash-in-lieu programs) taken into account for purposes of determining whether an applicable large employer has made an offer of affordable coverage under an employer-sponsored plan?

Ruling and Short Answer

If an employer offers an employee an amount that cannot be used to pay for coverage under the employer’s health plan and is available only if the employee declines coverage under the employer’s health plan (an “opt-out” payment), the employer must add that opt-out amount to its required contribution amount for the purpose of determining whether the employer offers affordable care under PPACA. The IRS and Treasury rationalize that the employee may purchase the health plan coverage only at the price of forgoing a specified amount of cash compensation that the employee would otherwise receive – salary, in the case of a salary reduction, or other compensation, in the case of the opt-out payment.

IRS Rationale and Example

In the IRS's judgement, an opt-out payment has the effect of increasing an employee’s contribution for health coverage beyond the amount of any salary reduction contribution.  Foregoing that opt-out, concludes the IRS, compels an employer to add the cash-in-lieu amount to the employee contribution in calculating PPACA affordability.

Example: if an employer offers employees group health coverage through a § 125 cafeteria plan, requiring employees who elect 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, the offer of $100 in additional compensation has the economic effect of increasing the employee’s contribution for the 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.

Timing and Relief Period

Consistent with this analysis, Treasury and IRS have determined that it is generally appropriate to treat an unconditional opt-out arrangement as part of the employee contribution amount. Accordingly, Treasury and IRS intend to propose regulations reflecting this rule and requesting comments on the treatment of employer offers of opt-out payments.

Regulations generally apply only for periods after the issuance of final regulations. However, Treasury and IRS anticipate that mandatory inclusion in the employee’s required contribution of amounts offered or provided under an unconditional opt-out arrangement that is adopted after December 16, 2015 (a “non-relief-eligible opt-out arrangement”) will apply for periods after December 16, 2015.

For this purpose, an opt- out arrangement will be treated as adopted after December 16, 2015 unless:

1. the employer offered the opt-out arrangement (or a substantially similar opt-out arrangement) with respect to health coverage provided for a plan year including December 16, 2015;
2. a board, committee, or similar body or an authorized officer of the employer specifically adopted the opt-out arrangement before December 16, 2015; or
3. the employer had provided written communications to employees on or before December 16, 2015 indicating that the opt-out arrangement would be offered to employees at some time in the future.

For the period prior to the applicability date of regulations, employers are not required to increase the amount of an employee’s required contribution by the amount of an opt-out payment (other than a payment made under a non-relief-eligible opt-out arrangement) for purposes of § 6056 (Form 1095-C).  Therefore, an opt-out payment (other than a payment made under a non-relief-eligible opt-out arrangement) will not be treated as increasing an employee’s required contribution for purposes of any potential consequences under § 4980H(b).

However, until the applicability date of any further guidance (and in any event for plan years beginning before January 1, 2017), individual taxpayers may rely on the treatment of unconditional opt-out payments described herein for purposes of §§ 36B and 5000A and treat these payments as increasing the employer’s required contribution.

Commentary and Conclusion:

Under the principles set forth in this Notice, an employer may continue opt-out payments without having to include those opt-out amounts in the employee contributions so long as that employer had a published opt-out policy in place prior to December 16, 2015. However, the IRS' final regulations on this matter could eliminate this particular grace/relief period in a subsequent year once the IRS adopts final regulations. This notice does not provide that previously existing opt out policies will be “grandfathered” indefinitely. It simply states that until further regulation, this notice may be relied upon by employers.

  

New Budget Deal Takes a Bite Out of Obamacare. Beginning of the End of the Cadillac Tax & Other Tax Moratoriums

Earlier this week, Republicans and Democrats in congress agreed to a new budget deal that will have significant impacts on PPACA.  This is a quick rundown of how the the Consolidated Appropriations Act, 2016 and the Orwellianly named, Protecting Americans from Tax Hikes Act of 2015 (I feel better already) will impact Health Reform.  

The Cadillac Tax, set to begin in 2018, is now delayed to 2020.  This tax is done. I've said that many times over the years and this was just the first official step in that process.  President Obama was never going to sign a bill repealing it, but businesses began cutting back on health plans in preparation for it.  In this compromise, President Obama can avoid the embarrassment of repealing it while businesses don't have to start making the unpopular cuts associated with it.

Every one of the three Democratic candidates for President and all of the 178 or so Republican candidates are against this tax.  Soon after inauguration, a new President will officially repeal or further erode it.  Perhaps we can engage in endless delays for a couple of decades before we repeal it - like lawmakers did on the Medicare "Doc Fix."

Just in case it is not delayed again or repealed, Republicans were able to get Democrats to agree to make the penalties associated with the tax deductible as business expenses.  This alone substantially weakens the impact of the Cadillac Tax. 

This two-year delay means that health plans (ultimately insureds) get to keep about $3 billion more of their money in 2018 and another $6 billion in 2019 according to the Congressional Budget Office.  It also means that in order to keep Obamacare, we need to borrow that $9 billion from China, Japan and the Social Security Program.  Go ahead and add it to our tab, we're good for it! 

The Health Insurance Provider Tax and Medical Device Tax won't be collected in 2017 as part of a one year moratorium.  This is just an odd compromise.  These taxes have both been in effect since 2013.  Again, I suspect the logic was that Obama would not sign a full repeal, but would sign off on a one year reprieve.  Hence, the cost of family coverage will be about $530 less in 2017.  Individuals will save about $170 in 2017.  And the price of Obamacare goes up about $12 billion in return.  That gets tacked onto our national debt.

Permanently nixing all three taxes (Cadillac, insurer and medical device) would save taxpayers at least $253 billion through 2025, according to the Congressional Budget Office.

Rubio's "Truth in Government" Risk Corridor Funding Limits Remain in Place for Another Year.  This spending bill will, once again, limit funding of the risk corridor program to the fees that the program collects from insurers that have excess profits.  This was how Obamacare was originally sold to the public.  In 2014 Senator Rubio insisted that the program retain that aspect of neutral funding in the face of an avalanche of changes to the law that threatened to increase the overall cost of PPACA.

His prognostication was correct.  The government's projections were so far off that insurers got back less than 10% of the losses for which they anticipated reimbursement.  Many assumed that federal bureaucrats would simply rob Peter to pay Paul and pay out these losses from other funds.  Hence, this became known as an "insurer bailout" program.  But thus far it has not been and won't be again in 2015.

No Unconstitutional IPAB "Death Panel" In 2016.  The new budget bill also guts the Independent Payment Advisory Board temporarily in 2016. The IPAB was supposed to be a panel of "experts" (aka, unelected bureaucrats) who would recommend binding spending cuts in Medicare to help pay for PPACA.  IPAB has not yet been established.  And this bill makes it almost certain it will not be in 2016.  PPACA does, however, give the HHS Secretary authority to take action for the IPAB if it cannot make recommendations so this battle is not yet over.

PPACA is changing as rapidly as ever.  More importantly, the recent changes are legislative as opposed to many of the extra-constitutional administrative and Presidential changes we saw in 2013 and 2014.  Just yesterday, Democratic presidential candidate Hillary Clinton said President Obama's healthcare is pushing people into part-time positions.  She and many Republicans are eager to address that issue by redefining full-time to be 40 hours a week as opposed to 30 or some other significant change to the employer mandate.  We will continue to see substantial uncertainty until we know who the President will be in 2017.

CBO Projects 2 Million Fewer Jobs Under ObamaCare

From The Hill:

ObamaCare is expected to cost the U.S. workforce a total of 2 million jobs over the next decade, Congress’s nonpartisan scorekeeper said Monday. 

The total workforce will shrink by just under 1 percent as a result of the new coverage expansions, mandates and changes in tax rates, according to a 22-page report released by the Congressional Budget Office (CBO). 

“Some people would choose to work fewer hours; others would leave the labor force entirely or remain unemployed for longer than they otherwise would,” the agency said in its latest analysis of the now five-year-old law. ...

 

Three Out of Four US Employers to Be Hit With Cadillac Tax by 2022

 From Yahoo Finance:

Many employers falsely assume that the Cadillac tax will apply only to the richest plans. However, newly release data from the 2015 UBA Health Plan Survey shows that even the lowest quality "Bronze-level" health insurance plans on the Affordable Care Act (ACA) exchanges are at risk of triggering the tax, potentially affecting 74 percent of employers by 2022. ...

United Benefit Advisors' Health Plan Survey, the nation's most comprehensive benchmarking survey of employer-sponsored health plans, includes responses from more than 10,000 employers that mirror 99 percent of American businesses. 

The Cadillac tax, which takes effect in 2018, will levy a 40 percent tax on health insurance plans that cost more than $10,200 for individuals and $27,500 for families. The excise tax is not currently based on benefit levels, but is solely based on annual premiums. Current regulations also will include employer and employee contributions to Health Reimbursement Arrangements (HRAs), Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). (UBA does not include these amounts into the trend increases below.) 

Using a six percent rate or "trend" increase, compounded each year, UBA finds that by 2018, 30 percent of employers will be subject to the Cadillac tax; by 2020, 50 percent; and by 2022 it will hit 73.79 percent of employers. ...

 

10 Things You MUST Know About the New PPACA Regs

A great short read from friend, Allison Bell over at LifeHealthPro.  Here are two of my favorites:

• The tri agencies will let the HRAs in group health-HRA packages escape from the PPACA ban on annual lifetime and benefits limits, but they are, effectively, banning individual health-HRA packages by requiring the HRAs in those packages to provide unlimited benefits for EHB services.  
•  Plans with locally based provider networks will have to open up to out-of-area dependent children.  

  

Penalty Risk When Dropping Coverage for Unpaid Premiums During Leaves Under PPAA

 From Graydon Head & Ritchey LLP.:

... Fortunately, the path to avoiding ACA penalties in this situation should look very familiar for employers subject to COBRA.  

The IRS treats an employer as having made an offer of coverage to a full-time employee if coverage terminates because the employee fails to timely pay the premiums. Effectively, you can terminate the employee’s coverage without fear that the employee will go to the exchanges, receive a subsidy, and trigger the penalties. However, just like COBRA, the IRS treats a premium payment as timely if paid within a 30-day grace period, and it is considered paid on the date the employee mails the check. So, for our scenario above, you may need to hold tight through the beginning of the third month before you verify that premiums will not be timely paid and terminate coverage.   Once you terminate the coverage for failing to pay a premium, you do not have to offer the employee coverage again until the next open enrollment period even if the employee returns to work sooner, and then only if the employee returns to a full-time position or is determined to be a full-time lookback employee despite the time spent on leave. ... 

 

The Embarrassing "Solution" to America's Health Insurance Crisis

This is from Jed Graham at IBD: 

Who gets the worst deal from ObamaCare? It's no contest: A few million modest-wage workers — and their spouses — can't qualify for exchange subsidies but many will owe a $695 penalty. 

They're full-time workers for companies that offer health insurance that meets ObamaCare's dubious "affordability test." 

Consider single workers earning $17,500, or 150% of the poverty level. For such workers, bronze-type coverage with a $5,000-plus deductible is deemed affordable in 2015 even if it costs $1,670 — just under 10% of income. That's 15 times the $9 a month or less it costs workers at the same income level to buy subsidized bronze-level policies via HealthCare.gov.

...[K]ey points about this clearly unequal treatment: 

Exacerbating Income Inequality 

First, for many modest-wage workers, ObamaCare makes income inequality worse. The $695 penalty for failing to buy coverage will amount to a pay cut of 4%, or 33 cents an hour, for these $8.42-an-hour workers. 

Dodging The Employer Mandate 

Second, many employers have figured out they can keep a lid on health insurance costs and still dodge ObamaCare's employer mandate penalty by offering "affordable" coverage that modest-wage workers find unaffordable. That's a big reason why the employer mandate, though it's had a clear negative effect on low-wage work hours, hasn't been nearly as big of a problem as some feared. 

But trading one negative consequence for another should provide little solace to supporters of the law, which was after all intended to ensure affordable care. 

Andy Puzder, CEO of Carl's Jr. and Hardee's parent CKE Restaurants, says that just 420 of 5,453 full-time workers offered a $5,500-deductible plan were willing to pay the $1,116 premium. The New York Times reports that insurance take-up by fewer than 10% of low-wage workers is commonplace. 

Wendy's (NASDAQ:) initially expected its health insurance tab to jump by $25,000 per restaurant, but cut that to $5,000 after finding few interested employees. 

Working Poor Aren't Enrolling 

... [T]hese uninsured full-time workers are hardly an exception. ObamaCare has, so far, failed to provide affordable care to a clear majority of modest-income individuals at 150% to 250% of the poverty level. Barely 1 in 4 in this income range who lack comprehensive employer coverage are getting silver-level exchange plans that carry more-or-less reasonable deductibles. That's based on an IBD analysis of enrollment data and multiple studies about the remaining uninsured population. ... 

By the end of September, paid exchange enrollment had dwindled to about 9.5 million, down from 11.7 million who selected plans at the start of the year. Now, there are roughly 2.7 million individuals with income between 150% and 250% of the poverty level with silver coverage, but that compares to a potential market in the neighborhood of 10 million, if full-time uninsured workers were included.... 

Oddly, ObamaCare has two sometimes contradictory definitions of "affordable." One, for employer plans, says coverage is affordable in 2016 if it costs no more than 9.66% of income, which means employees can't access exchange subsidies. The other says individuals should be granted a waiver from the individual mandate if the cheapest coverage available to them costs more than 8.13% of income. But that still means a $17,500 earner offered a $1,400 employer plan would have to buy it or face a penalty. 

To add insult to injury, the American Action Forum estimates that one million spouses are ineligible for exchange subsidies because they are married to someone with an offer of affordable employer coverage. ...

  

Stories Causing Atlas to Shrug, Dec. 1 | Woeful Enrollment Numbers, Fake Enrollees & Sky-High Deductibles

But At Least They are Watching Our Dollars: Obamacare Exchanges Fail to Catch 17 of 18 Fake Enrollees, GAO Audit

• Gov. auditors signed up 17 out of 18 fake ObamaCare enrollees for coverage through federal and state exchanges, a report released in October. 
• The GAO sent 10 auditors with fictitious enrollment information to the federal healthcare.gov site as well as two state-run ObamaCare exchanges, to sign up. 
• While eight didn't make it through the initial identity-checking process, all 10 eventually obtained coverage, even though four obviously had made up Social Security numbers that started with "000." 
• They all were able to keep their coverage despite filing fake follow-up documentation.
• In addition, the GAO tried to sign up 8 more up for Medicaid coverage. 3 made it through the process, and 4 ended up getting taxpayer subsidized private coverage instead. 

Obamacare's Woeful Enrollment and Rising Loss Ratios will Force a Rewrite to Survive.

• There are about 9.1 million enrollees today, and the consensus estimate—by the Congressional Budget Office, the Medicare actuary and independent analysts like Rand Corp.—was that participation would surge to some 20 million. But HHS now expects enrollment to grow to between merely 9.4 million and 11.4 million.
• For every person who’s subsidized to join and has, two people haven’t.
• The law’s failure to appeal to the young and rising middle class is already cascading through the insurance markets. 
• Most employer plan increase are between 8% and 13% (at least 3% of that is due to Obamacare taxes and fees). Aetna has requested all small employers in California pay 27.4% more in 2016. 
• Most Obamacare plan are going up 10% to 50%. 
• Overall, insurers providing Obamacare plans lost 12% in 2014 despite a $7.9 billion taxpayer handout. 
• And this weak enrollment is true even though, in CA for example, taxpayers pay 75% of premium for Obamacare recipients. Families making up to $96K qualify for the handouts.

Patients Now Avoiding Care Because of the High Deductibles and Meager Doc Lists Made Popular by Obamacare. A new survey of emergency room physicians suggests that many who have insurance are still avoiding care because of their insurance plan's high out-of-pocket costs.

• The poll of 1,433 ER doctors by the American Academy of Emergency Physicians found that 70% of ER doctors reported treating patients who have health insurance but have forgone necessary medical care due to cost. 
• The study also revealed a troubling pattern in which patients end up in the ER because they can't find non-emergency doctors to treat them. 
• According to the poll, 80 percent of ER doctors report treating patients who said they were having trouble finding relevant specialists included in their health plan. 
• Similarly, 73 percent report seeing increased numbers of Medicaid patients in the ER because insurers weren't providing enough primary care physicians or specialists. 

Fun facts on healthcare and retirement:

• Retiring in Idaho only takes 40% of the cash that's required to retire in California. $1M vs. $400K (savings required in addition to Social Security for a 65 year old to retire). 

• A 65-year-old couple who retires this year without employer-provided health insurance will need about $245,000 to pay future medical-related expenses. 

Why the Obamacare Ponzi Scheme is Hemorrhaging and Will Fail in One Page

Excellent summary from Devon Herrick over at IBD:

Average health spending per capita in the United States is around $8,600 annually. But it’s not distributed evenly. About 80 percent of the enrollees are healthy. They collectively consume only 20 percent of the health care dollars used; about $2,150 per year on average. However, some people are ticking time bombs. The least healthy 20 percent spend an average of about $35,000 yearly. 

On average:

• About 10 percent of the population has health concerns accounting for 17 percent of spending.

• Another 5 percent have serious health concerns accounting for 16 percent of health spending expenditures.

• The next 4 percent consumes nearly one-quarter of health care dollars (27 percent), while;

• The sickest 1 percent of patients accounts for 20 percent of spending.

• Think about that for a moment: the sickest 5 percent of the population consumes nearly half of all health care dollars. Of course, most of those are not really genetic losers. Many are merely aged seniors in their last months of life.

Obamacare purposely attempts to make health care affordable by forcing the healthy 80 percent to shoulder more of the costs for the unhealthy 20 percent. But that does not make care affordable; it merely shifts the costs from one party to another.