Federal contractors subject to the Service Contract Act might appreciate knowing that the IRS understands that they must generally offer a cash payment to employees who decline coverage. While that would ordinarily be treated as making coverage less affordable and more likely to violate the Affordable Care Act’s affordability requirements, the IRS will not necessarily treat it this way; particularly in light of the 2017 executive order directing the IRS to exercise available discretion to reduce the burdens imposed by the ACA.
Background. In general, employers are limited in what they can require employees to pay as health insurance premiums. Cash payments offered to employees for opting out of coverage are added to (i.e., increases) the premium price when the IRS considers the premium charged. For example, if an employee must pay $3,000 for coverage and forgo an opt-out cash payment of $1,000, the employee premium is considered to be $4,000. There are ways to avoid this treatment, but they generally involve eliminating the employee’s opportunity to receive the payment in cash.
Updated guidance. In June, the IRS issued a letter acknowledging that the IRS’ general treatment of opt-out cash payments could cause federal contractors who are required by the SCA to offer opt-out cash payments to violate the ACA’s affordability requirements. In its acknowledgment, the IRS expressed its intention to interpret the affordability requirements in a manner that avoids this problem. While the IRS did not directly say so, the implication is that opt-out cash payments that are required under the SCA will be ignored when assessing ACA affordability compliance.
If you have any questions about this guidance, or any other employer-sponsored benefit plan issue, please contact the author of this article or the Carlton Fields attorney with whom you usually communicate.