Monday, October 19, 2015

Health Plan Opt-Outs in the News

By RobertaGranadier

Many employers used to offer cash payments to employees who declined coverage under their group health plans. Cash opt-out payments were popular because employers saved money on health plan premiums or claims expenses and employees who had access to cheaper or better coverage received additional cash compensation. Rising healthcare costs and the Patient Protection and Affordable Care Act (“ACA”) changed all of that.

The trend over the past few years has been for employers to eliminate cash opt-out payments entirely. If employees have access to alternative coverage, employers do not feel obligated to compensate employees for declining their coverage. As medical costs increase, employers are seeking cost reduction features such as consumer driven health plans, also known as high deductible health plans, spousal exclusions and spousal carve-outs. Paying employees to opt-out of coverage has also become less popular. 

The ACA has also impacted the popularity of cash opt-out payments in two ways. First, in November 2014, the Labor, Health and Human Services, and Treasury Departments issued Frequently Asked Questions (FAQ) XXII, which addressed potential discrimination relating to medical opt-out bonuses. In FAQ XXII, a hypothetical employer offered a $10,000 opt-out payment to an individual with a high claims risk in order to encourage such individual to enroll in the Marketplace rather than the employer’s group health plan. The objective was to reduce the employer’s cost by shifting the employee’s potentially expensive claims to the Marketplace. FAQ XXII concluded that the incentive to decline coverage was not permissible discrimination and such approach violates ACA’s prohibition against discriminating on the basis of a health condition. 

The ACA also makes cash opt-out payments less attractive because the payment may impact the plan’s ability to satisfy the affordability requirements under ACA. A group health plan will satisfy ACA’s affordability requirement if the employee contribution for employee-only coverage does not exceed 9.5% of the employee’s household income. There are various safe harbor calculations for determining 9.5% of employee income. The recent controversy revolves around a concern that the employee contribution is not just the amount the employee pays for coverage, but also the opt-out amount. This means that the affordability requirement is only satisfied if the employee contribution for employee-only coverage plus the cash opt-out payment is less than 9.5% of the employee’s income. Depending on the size of the opt-out payment, the employee contribution, and the employee’s wages, a plan which is otherwise ACA-compliant may have problems satisfying the affordability requirement.

Many health plan insurers, consultants and brokers are advising employers to take a conservative approach and either eliminate or reduce cash opt-out payments. Until the Departments issue definitive guidance on this point, this will remain a controversial issue and reduce the popularity of cash opt-out payments.

If you have any questions, please contact Roberta Granadier in our Troy, Mich. office at 248-433-7552.