Opt-Out Payments and ACA Affordability
Paying employees to decline your health plan can change how the ACA measures whether that plan is affordable. The IRS addressed it in Notice 2015-87, and the details matter for any employer near the mandate.
What Notice 2015-87 Says
The IRS and Treasury issued the guidance on December 16, 2015.
Unconditional Opt-Out Payments
A payment conditioned solely on an employee declining the employer’s coverage is generally treated the same way as a salary reduction when determining the employee’s required contribution. It is added to the contribution for the premium tax credit, the individual mandate, and the employer B penalty analysis. Compare the payment with the cost of enrolling using our opt-out payment calculator.
Conditional Payments
Payments that also require something meaningful, such as proof of coverage through a spouse’s employer, were left for future proposed regulations that would request comments. Our free employee premium percent of pay calculator shows what share of pay the employee premium takes.
Transition Treatment
Until regulations apply, and in any case for plan years before January 1, 2017, employers did not have to add these payments to the required contribution for Form 1095-C or the B penalty, except for arrangements the notice calls non-relief-eligible.
Non-Relief-Eligible Arrangements
Arrangements offered or adopted after December 16, 2015 without earlier documentation. These were expected to count for periods after that date. Employers that have an opt-out payment in place should review how and when it was adopted, and keep any documentation that predates the cutoff. Counsel can say whether an arrangement is likely to be treated as grandfathered.
Why It Matters
Adding the payment raises the employee’s required contribution, which can push the plan past the affordability line. Even a modest payment can matter, because the affordability test is applied to the employee’s required contribution. A change of a few dollars can move a plan from passing to failing, so run the numbers before offering it.
Check Current Status
Because the notice anticipated regulations, confirm the current rule with counsel before designing or keeping an opt-out payment. Guidance in this area has been issued as a notice that anticipated later rules. Check what currently applies, and revisit any opt-out payment each year as the rules or the plan design change.
Questions to Ask Before Paying Employees to Opt Out
Opt-out payments are common in lean-contribution designs. The question is whether they remain affordable.
Are We Near The Mandate?
The analysis matters most for applicable large employers and those approaching the 50-employee line. Employers with fewer than 50 full-time-equivalent employees should still know the rules if growth or an acquisition could bring them near the line. Planning ahead avoids a surprise in the first year of coverage.
Is The Payment Unconditional?
If it is paid solely for declining coverage, assume it adds to the required contribution. A payment conditioned on proof of other coverage may be treated differently from one paid for declining coverage alone, but the distinction is a fine one. Ask counsel to review the wording before offering any condition.
Is It In Writing?
Document the arrangement and its conditions. Put the opt-out terms in the plan documents or a written policy, including who qualifies, how much is paid and what proof is needed. Written terms help with consistent administration and with any later review.
Re-Run Affordability
Add the payment to the employee contribution before testing against the safe harbors. Calculate the employee’s required contribution with the payment included, then compare the result to the affordability safe harbors the employer uses. Do this for each coverage level that employees can choose.
Consider Alternatives
Contribution strategy, plan tiers and HRA structures can reach similar goals without the opt-out math. If the opt-out payment makes affordability harder to meet, look at tiered contributions, a different plan mix or an HRA design. Each has its own rules, so review the options with counsel and a tax adviser.
Get Advice
This is an area where the final rules were anticipated, so involve counsel. Because the rules were written in anticipation of later regulations, an employer should not rely on a single reading. Ask counsel to confirm the current treatment before adopting, changing or ending an opt-out payment.
Questions We Get About Opt-Out Payments
Do opt-out payments count against affordability?
An unconditional opt-out payment is generally treated like a salary reduction, which increases the required employee contribution for the measures in Notice 2015-87.
What is an unconditional opt-out payment?
One conditioned solely on declining the employer’s coverage, without another meaningful requirement.
What about payments requiring proof of other coverage?
The notice left conditional payments for future proposed regulations. Seek current guidance.
Did the notice give transition relief?
Yes, for plan years before January 1, 2017 and until regulations applied, with exceptions for non-relief-eligible arrangements.
Do HRA contributions reduce the employee contribution?
Yes, if integrated with the group health plan and determinable before the enrollment decision.
Do flex credits reduce it?
Only health flex contributions that cannot be taken as cash and are usable only for medical care.
What is the 2026 affordability percentage?
9.96% for plan years beginning in 2026.
Is this relevant to small employers?
Mostly to applicable large employers, but any employer near 50 full-time employees should know the rule.
Is this legal advice?
No. This page is general information, not legal advice. Rules change and facts differ, so confirm your situation with your attorney or tax advisor.
Related Guides
Related reading: ACA Affordability Calculator · ACA Employer Mandate B Penalty · ACA 1094-C and 1095-C Reporting · Section 125 Cafeteria Plans · Controlled Group Rules · ACA Affordability Safe Harbors Explained
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Laws and rules referenced
IRS Notice 2015-87 — Treatment of opt-out payments for ACA affordability and Form 1095-C reporting (Part III, Q&A-9).
26 U.S.C. § 36B(c)(2)(C) — Employer coverage is affordable when the employee’s cost is within the percentage of household income the IRS sets each year.
26 U.S.C. § 4980H — Employer shared responsibility: who is an applicable large employer and when a penalty applies.
This page is general information, not legal or tax advice. Rules change and facts matter, so confirm your situation with counsel or a qualified advisor.
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