Many employers provide a cash payment to an employee who waives employee medical plan coverage.  Contrary to popular belief, this practice is not “illegal” under U.S. law.  However, because of new guidance contained in IRS Notice, 2015-87 (December 16, 2015), employers may want to provide “waiver payments” to U.S. employees, only if they can show that they have other health care plan coverage.

New IRS guidance

The best way to understand the new IRS guidance is by example.  Assume an employer has a medical plan and charges employees $80.00 per month for single coverage; and that the employer offers a $100.00 per month cash payment to an employee who waives coverage.

The IRS view is that if the employee’s waiver of coverage is “unconditional”, the cost of the employee coverage is $180.00 per month.  Thus, in essence, the employer also has to count the extra $100.00 per month that the employee could receive in cash, if he or she waived coverage.

Nevertheless, it appears that this result can be avoided if the employee’s waiver of coverage has some meaningful “conditions” attached to it.  For example, this result can be avoided if the waiver payment is conditioned on the employee demonstrating that he or she has other medical plan coverage.

The practical impact

Under IRC Section 4980H(b), an employer can be subject to a monthly tax ($260.00 in 2015) if (i) the employer’s offer of medical plan coverage to an employee is not “affordable”, and (ii) the employee enrolls for coverage at the Exchange.

Essentially, this new interpretation of the law pertaining to unconditional waivers can turn “affordable” coverage into coverage that is “not affordable”.  Using the foregoing example, if the cost of employee only coverage is $80.00 per month, that cost clearly is “affordable” under IRC Section 4980H.  However, if the cost to the employee must be considered $180.00 per month, that cost will not be “affordable” for some employees.

What should an employer do?

If an employer is currently using an “unconditional” waiver of coverage, should it modify that practice to require an employee to show evidence of other coverage?  Certainly, doing so will help to insulate the employer from some level of potential tax liability under IRC Section 4980H(b).  However, if the actual amount of tax risk is minimal, the employer may want to consider whether it is worthwhile amending its policies and practices to require proof of other coverage.  It is a judgment call.

The effective date

At this point, the IRS has simply announced that it is anticipating issuing new regulations in the future that will provide for this result.

The IRS has stated that if an employer had an existing waiver of coverage option for employees as of December 15, 2015, the new rules will not apply to that existing waiver option, until after the new regulations are issued.  Thus, no immediate changes are necessary for existing waiver policies.

Nevertheless, if an employer institutes a new waiver of coverage option after December 15, 2015, the new rules described above will immediately apply to that new waiver of coverage option.