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Cafeteria Plan & opting out of medical


Nubee
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Hi all, I'm new to this world, so please bear with me.  I'm hoping I can get insight from this Board regarding the following scenario:

Large government employer (~550 employees) currently offers a cafeteria plan which employees can use to pay premiums for medical, dental, life, and to make contributions to FSA and HSA.  Employees must elect one of the medical policies offered, but otherwise they can take the rest as cash if they make no other elections/contributions.

Employer is considering allowing employees to opt out of medical coverage if they can show that they are covered under their spouse's medical.  This would mean that employees may get all the cash from the cafeteria plan if they make no elections/contributions.

Depending on which union the employee belongs to, the employee will have a different total cap on his/her cafeteria plan.

What issues do you see?  

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20 minutes ago, Nubee said:

Hi all, I'm new to this world, so please bear with me.  I'm hoping I can get insight from this Board regarding the following scenario:

Large government employer (~550 employees) currently offers a cafeteria plan which employees can use to pay premiums for medical, dental, life, and to make contributions to FSA and HSA.  Employees must elect one of the medical policies offered, but otherwise they can take the rest as cash if they make no other elections/contributions.

Employer is considering allowing employees to opt out of medical coverage if they can show that they are covered under their spouse's medical.  This would mean that employees may get all the cash from the cafeteria plan if they make no elections/contributions.

Depending on which union the employee belongs to, the employee will have a different total cap on his/her cafeteria plan.

What issues do you see?  

No issues.  This is a strategy used by many employers.

 

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There can be issues with the health insurance providers that set their rates based on anticipated participation.  This would be especially true with a single provider.  If the participation criteria change  (e.g. option to opt out) so that the number of participants in the health plan decline, the actuarial expectations, and therefore the pricing of the coverage, may be frustrated.  The contract may have restrictions on changing coverage criteria mid-year, for example.  If it does not, the change is likely to be taken into account in the next year's calculation of premiums.

In a three provider environment, this may not be an issue because the providers are competing and less able to predict the number of employees that will choose the provider.  However, changes that reduce, or may reduce, the total participant pool may affect how the providers approach  pricing.  And it will not be in a favorable direction.

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Keep in mind there are ACA employer mandate affordability considerations with opt-out credits.  The approach you described might not quite fit an "eligible opt-out arrangement" without some additional tweaking.

Here's a short summary:

https://www.theabdteam.com/blog/how-the-aca-affordability-increase-to-9-83-affects-employers/

How Do Opt-Out Credits Affect the Affordability Determination?

The general rule is that the amount of the opt-out credit must be added to the employee-share of the cheapest plan option providing minimum value that is used to determine affordability.

Example: The employee-share of the premium for the employer’s cheapest plan option providing minimum value is $75/month for employee-only coverage.  The plan offers a $25/month opt-out credit for employees who decline enrollment.  Under the general rule, the plan costs $100/month ($75/month premium plus $25 opt-out credit) for purposes of the affordability rules to reflect the $25/month an employee forgoes when electing to enroll.

To avoid the need to add the opt-out credit amount to the cost of the plan, the opt-out credit must meet the definition of an “eligible opt-out arrangement,” which requires:

  1. The opt-out credit is conditioned on the employee declining to enroll in the major medical plan; and
  2. The opt-out credit is conditioned on the employee providing reasonable evidence (including an employee attestation) annually that the employee and all members of the employee’s expected tax family have or will have minimum essential coverage under a group health plan during the period of coverage to which the opt-out credit applies.

Note: In late 2016, the IRS indefinitely delayed these eligible opt-out arrangement rules for opt-out credits in place prior to December 16, 2015.

Action Item: If you are adding an opt-out credit, make sure that you follow these eligible opt-out arrangement conditions to ensure that the opt-out credit does not affect whether your offer of coverage meets an affordability safe harbor.

 

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Thank you all for the responses.  Employer is part of a consortium of several other government agencies - that is the group for health insurance purposes for both providers.  Let's say the total cap for the cafeteria plan is $1,500/month for union members (this amount is different for unrepresented employees).  We have tiered rates so individual-only coverage is cheaper than family coverage.   Let's say the cheapest medical plan is for individual coverage at $500/month.  Employer offers two health insurance providers.  

I'm trying to figure out where our scenario fits.  For example, Employee A was paying $500/month for individual coverage, and Employee B was paying $1000/month for family coverage, and both are using their cafeteria plan to pay for those premiums. Now that the employer is allowing opt out, both opt out, and they want to take as cash back the premiums they were paying (i.e. $500/month and $1000/month) out of their cafeteria plan.  Basically, employer is not offering a flat opt-out credit for all employees; what the employees take as cash back is based on the premiums they were paying out of their cafeteria plan. 

Is this allowed?  Is having a cafeteria plan making it more complicated to have an opt out for ACA purposes?  Since the employer is providing a cap of $1,500 in the cafeteria plan, is there any affordability issue?  If more than 95% of our employees decide to opt out, do we get hit with the "A" penalty, even though employer did offer coverage and it was the employee who decided to opt out?  Does employer get hit with any penalty ("A" or "B") if the only way employer allows opt out is by showing that they are covered under their spouse's employer-sponsored health insurance?

FYI, we will be consulting with appropriate counsel, but I just want to get ahead of that so I can understand a little better what the potential issues may be.

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This is now getting more complicated, and we are lacking details to give you any definitive answers.

Is an employer allowed to give employees money in exchange for opting out?  Yes.

Can it be in varying amounts based on a different coverage level?  Yes.

Is there an affordability issue?  Probably not because people opting out of their plan is not a cause for affordability.  Affordability is determined by determining the cost of the group plan in relation to the employees income.

Part A triggered if 95% opt out?  Again, probably not.  As long as employer offers it makes no difference.

Employer hit with A and B if the only way...probably not.

Could you please be a little more forthcoming with the reason why you are asking these questions?  Based on your first post I assumed you were asking for yourself because your employer is now making this available.  Your last post has questions that go beyond.  Thanks.

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@Nubee What you're describing actually isn't an opt-out credit, but rather cashable flex credits.

That is a problem for ACA affordability issues because flex credits need to be designed as "health flex contributions to count toward the employer-share of the premium.  Cashable flex credits are not health flex contributions for this purpose.

 

Here's an overview:

https://www.theabdteam.com/blog/how-the-aca-affordability-increase-to-9-83-affects-employers/

 

How Do Flex Credits Affect the Affordability Determination?

Flex credits will reduce the dollar amount of the employee-share of the cheapest plan option providing minimum value that is used to determine affordability if they meet a three-part test to qualify as a “health flex contribution”:

  1. The employee may not opt to receive the amount as a taxable benefit (i.e., it is not a cashable flex credit);
  2. The employee may use the amount to pay for minimum essential coverage (i.e., the employer’s major medical plan); and
  3. The employee may use the amount exclusively for medical/dental/vision coverage costs.

Action Item: If you offer a defined contribution-style flex credit approach to employees, make sure that a sufficient portion are designated as “health flex contributions” to qualify under an affordability safe harbor.  This will require at least some of the flex credits be non-cashable and designated for health plan purposes only.

For more details, see our ABD Alert How the ACA Affects Flex Credits.

 

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