Flex Credits and Opt-out Payments under the ACA (Benefit Minute)

Posted in: Benefit Minute, Employee Benefits

The Internal Revenue Service (IRS) recently issued Notice 2015-87 which provides guidance on several topics under the Affordable Care Act (ACA).  This includes reporting and affordability treatment of employer-provided flex credits, opt-out credits and similar arrangements.

Cafeteria Plan Flex Credits

Employer contributions to a cafeteria plan are generally referred to as flex credits or employer flex contributions.  Flex credits can often be used to purchase a wide array of benefits available under the plan, and unused amounts can sometimes be taken as additional taxable cash compensation.  Since employees are given a choice as to how to use these employer-provided flex credits, questions have been raised about whether these they should be treated as employer contributions or employee contributions under the ACA.  Notice 2015-87 states that the treatment for affordability and reporting purposes depends on the nature of the flex credit.

The flex credit must qualify as a “health flex contribution” to be treated as an employer contribution.  Requirements for a “health flex contribution” are:

  • Cannot be taken as taxable cash or used for other taxable benefits;
  • May be used towards the employee’s cost of health coverage; and
  • May be used for medical care under Code section 213.

Since there is no economic benefit to an employee who does not use the flex credit for health benefits, the IRS has determined that a “health flex contribution” reduces the employee’s required contribution for purposes of affordability under the ACA.

Conversely, if the flex credit is not a “health flex contribution” (because it can be used for non-health benefits or taken in cash), then the flex credit does not reduce the employee’s required contribution.  The IRS states that it is not appropriate to assume an employee would use the flex credit to pay for health coverage since it can be used for other benefits.

However, for plan years beginning before January 1, 2017, all existing flex credit arrangements (i.e. adopted before December 16, 2015) may be treated as reducing the employee’s required contribution for purposes of ACA reporting and the employer’s exposure to unaffordability penalties.

Opt-out Credits

Some employers provide opt-out credits in the form of taxable cash to employees who waive the employer’s health coverage.  In Notice 2015-87, the IRS states that if the opt-out credit is unconditional,  the opt-out credit will increase the employee’s required contribution for affordability purposes since an employee who elects coverage is giving up the additional cash compensation.  An opt-out credit is unconditional if employees get the credit solely by declining coverage without having to meet any other meaningful requirement with respect to health coverage.  This treatment will apply beginning in 2016 for purposes of ACA reporting and an employer’s exposure to unaffordability penalties unless the opt-out arrangement was in place prior to December 16, 2015.  For existing arrangements, this treatment will apply after issuance of regulations.  Until then, the amount of the opt-out credit does not increase the employee’s required contribution in determining the employer’s exposure to unaffordability penalties.

For conditional opt-out credits, the IRS intends to issue additional guidance that will likely conclude that the opt-out credit provided in cash does not increase the employee’s required contribution since other conditions (such as providing proof of coverage in another employer-sponsored plan) must be met in order for the opt-out credit to be paid.  Employers that offer a conditional opt-out credit should ensure that the opt-out credit is only paid to those who have other group coverage, not individual market coverage.

Service Contract Act and Davis-Bacon Act

Workers employed on certain federal contracts that are subject to the Service Contract Act (SCA) or Davis-Bacon Act (DBA) must be provided fringe benefits of a sufficient value or be paid additional cash compensation in lieu of those benefits. Employers who offer SCA or DBA employees  an option to enroll in health coverage or to decline the coverage to take cash or other non-health benefits appear to be offering coverage that will often be deemed unaffordable under the ACA (due to the opt-out).  In Notice 2015-87, the IRS has stated that additional guidance will be forthcoming on how requirements of the SCA, DBA and ACA employer mandate may be coordinated.  Until such guidance is issued (and at least for plan years beginning before January 1, 2017), fringe benefit payments under the SCA or DBA will be treated as reducing an employee’s required contribution in determining the employer’s exposure to unaffordability penalties, even if the fringe benefit payments are available to employees in cash or other benefits.

Eligibility for Premium Tax Credits

Notice 2015-87 allows employers to report lower amounts for employees’ required contributions under the ACA, thereby reducing or eliminating an employer’s exposure to unaffordability penalties.  However, an individual’s eligibility for a premium tax credit will still be determined based on the higher required contribution amount (i.e. without the relief provided to employers in the Notice).  Employers may be asked to provide accurate information about the required contribution for employees who purchased Marketplace coverage.

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