8855 / How does an employer-sponsored opt out arrangement impact a taxpayer’s eligibility for the premium assistance tax credit?

Generally, the regulations provide that when determining whether employer-sponsored health coverage is affordable to an employee (so as to determine premium tax credit eligibility), the employee’s required contribution to coverage is considered, and includes the amount by which the employee’s salary would be reduced to enroll in the coverage.¹

IRS has proposed regulations address the impact of an offer of additional compensation in lieu of health coverage under a group health plan (known as “opt out” payments) on premium tax credit eligibility. The proposed regulations provide that if the opt out arrangement is unconditional, the amount made available pursuant to the arrangement increases the employee’s required contribution for premium tax credit eligibility purposes.² This rule recognizes that the promise of additional compensation in exchange for foregoing health coverage is analogous to a salary reduction made in order to obtain coverage.

However, the regulations provide that amounts made available under a conditional opt out arrangement that is an “eligible opt out arrangement” are disregarded. An eligible opt out arrangement is one under which the employee’s right to payment is conditioned on (1) the employee declining to enroll in employer-sponsored coverage, and (2) the employee providing reasonable evidence that he or she, and any dependents, will have coverage other than coverage obtained in the individual market (for example, a spouse’s employer-sponsored coverage) for the year in question.

An employee’s attestation that he or she has alternative coverage is considered reasonable evidence. An eligible opt out arrangement fails to be eligible, however, if the employer knows, or has reason to know, that the employee does not have the alternative coverage. The employer must obtain this reasonable evidence no less often than each year to which the eligible opt out arrangement applies (i.e., as part of the annual open enrollment process).³