In Notice 2015-87 the Internal Revenue Service (IRS) issued guidance on various health plan-related topics, including: (1) treatment of employer-provided opt-out payments for purposes of affordability under the Affordable Care Act (ACA); (2) the application of the ACA market reforms to health reimbursement arrangements (HRAs); (3) ACA issues relating to the McNamara-O’Hara Service Contract Act (SCA) and Davis-Bacon and Related Acts (DBRA); (4) the extension of special ACA rules for educational institutions; and (5) issues arising out of the interaction of COBRA with health flexible spending account plans (FSAs) that offer carryover options. 

Health Coverage Opt-Out Payments

Many employers offer an “opt-out” payment to employees who decline to enroll in the employer’s group health plan.  The IRS has now confirmed that the value of these types of opt-out payments should be counted as part of an employee’s premium payment in determining whether the employer is satisfying the affordability provisions of the ACA.  In the guidance, the IRS states that because employees who elect to enroll in coverage are effectively giving up the right to receive additional compensation where an opt-out payment is available, the IRS views this as the economic equivalent of charging a higher premium to employees. 

The IRS further indicates that it will be proposing regulations to reflect this rule and that the rule will only apply for periods after final regulations are issued.  However, according to the IRS, the rule will apply immediately for any opt-out arrangement that is adopted after December 16, 2015.  In addition, the notice states that the proposed regulations may address the treatment of opt-out payments that are conditioned not just on the employee declining coverage but also on satisfying an additional condition (such as proving that the employee has other coverage). 

Employers who implement a new opt-out provision after December 16, 2015 should confirm that they still meet the affordability requirements of the ACA.  Employers who previously adopted opt-out provisions should be aware that they may have to make changes once final regulations are issued. 

Health Reimbursement Arrangements

The IRS reconfirms several technical questions about using HRAs to reimburse premiums paid for individual market coverage, as follows:

• An HRA that covers less than two participants who are current employees is not subject to the market reforms.  This reconfirms that retiree-only HRAs can reimburse individual market insurance premiums.
• An HRA that does not meet the retiree-only exception may not be used to reimburse individual market insurance premiums for former employees.
• Unused amounts credited to an HRA before January 1, 2014 under terms that were in effect prior to January 1, 2013 may be used to reimburse medical expenses in accordance with the pre-2013 terms of the HRA without causing the HRA to be out of compliance with the annual dollar limit prohibition and preventive services requirements of ACA.
• An HRA reimbursing medical expenses for an employee and the employee’s spouse and/or dependents may not be integrated with self-only group coverage under the employer’s group health plan.  This prohibition will not be enforced until 2017. 
• An HRA that reimburses premiums for individual market coverage will not fail to comply with the market reforms if the coverage only includes excepted benefits (such as dental or vision). 
• In order to comply with the ACA, an HRA that is part of a cafeteria plan must be integrated with a group health plan, regardless of whether it is funded solely with employee salary deferrals or employer flex credits. 

McNamara-O’Hara Service Contract Act and Davis-Bacon and Related Acts

The IRS notes that the SCA and DBRA, which require federal contractors to pay prevailing wages and fringe benefits or pay cash in lieu of fringe benefits for workers, create complex issues under the ACA, especially for purposes of reporting the cost of coverage.  The IRS intends to continue reviewing how these laws will coordinate with the ACA.  In the meantime, until additional guidance is issued (and in any event for plan years beginning before January 1, 2017), for purposes of calculating ACA affordability, employer fringe benefit payments that are made available to employees to pay for employer-sponsored coverage will be treated as reducing the employee’s required contribution for participation, but only to the extent the payment is necessary to satisfy the requirements to provide fringe benefits under the SCA or DBRA.  In other words, these cash payments will be treated as making the coverage more affordable for employees for the time being.

Educational Institution Break in Service Rules

There are special rules that apply to educational institutions under the ACA for purposes of determining whether an employee has had a break in service.  Most employers may treat an employee who has a break in service of at least 13 weeks as having terminated from employment and been rehired.  For educational institutions, a 26 week break in service rule instead applies.  The IRS has been informed that educational institutions are attempting to avoid the application of this special rule by using staffing agencies.  The IRS intends to amend its regulations on this issue to provide that the special rules apply to any employee providing service primarily to one or more educational organizations, even if the employee is hired through a staffing agency. 

COBRA Continuation Rules and Health FSA Carryovers

Health FSA plans can provide for an optional carryover of up to $500 of unused amounts remaining at the end of a plan year.  A health FSA is not obligated to make COBRA continuation coverage available unless, as of the date of the COBRA qualifying event, the amount the qualified beneficiary may become entitled to receive is higher than the amount the FSA may require to be paid for COBRA coverage for the remainder of the plan year.  The IRS has now clarified that any amount carried over from a prior plan year is included in determining the amount of the benefit that the qualified beneficiary may become entitled to receive. 

Additionally, a self-insured group health plan can typically charge up to 102 percent of the premium cost for COBRA coverage based on a reasonable estimate of the cost of providing coverage to non-COBRA beneficiaries.  For health FSAs, an employer may base its reasonable estimate on the maximum amount available under the health FSA for the coverage period.  However, the IRS has clarified that the maximum amount does not include unused amounts carried over from prior years.  The applicable COBRA premium must be based solely on the sum of the employee’s salary reduction election for the year and any nonelective employer contribution.

Comments on Notice 2015-87 may be submitted until February 18, 2016.