A health plan opt-out is an optional incentive offered through a cafeteria plan by which an employee can elect to reduce or opt-out of other offered benefits in exchange for cash, alternative benefits or other credits. Opt-out incentives are attractive to employers because the cost of the opt-out incentive is often less than the cost of providing coverage. Opt-out benefits must only be offered through a properly established cafeteria plan, or any credits or other incentive offered to employees will be deemed taxable income by the IRS. Cash incentives, if offered, are always subject to taxation.
Opt-out Plans and the Affordable Care Act
The Affordable Care Act's employer mandate provisions compels applicable employers to offer minimum essential coverage that is both affordable and meets minimum value to their full-time employees, or else be subject to penalties. Employers offering flex credits and/or opt-out payments through their cafeteria plans initially believed that these credits or payments could be factored into the affordability calculation of their health plans, as they are employer contributions that could be used to offset the cost of coverage to the employee. However, the IRS has since issued guidance on this issue, and restricted employers' ability to factor these benefits into affordability calculations.
First, employers offering non-taxable flex credits must designate those credits only valid for purchasing medical coverage if the employers want to factor the value of those credits into determining affordability. Credits that can be used for purchasing other benefits (e.g. fringe benefits) cannot be used as a factor in determining affordability.
Second, employers offering taxable opt-out payments (i.e. cash) to employees in lieu of electing coverage must add this amount into the employees' cost of coverage, since employees electing coverage are foregoing the opt-out payment in addition to paying their premium cost for coverage. Therefore, a plan design offering medical coverage costing employees' $100 per month as well as offering an opt-out cash payment of $150 per month would result in a total cost of coverage of $250 to the employee.
This content is being provided as an informational tool. It is believed to be accurate at the time of posting and is subject to change. It is recommended that plans consult with their own experts or counsel to review all applicable federal and state legal requirements that may apply to their group health plan. By providing this information, Meritain Health is not exercising discretionary authority or assuming a plan fiduciary role, nor is Meritain Health providing legal advice.