Q. An employer wants to offer an incentive program that will pay $50/month for any employee that opts out of medical coverage. Can they do this as an applicable large employer? If so, what considerations should we review and share with their leadership team?
A. Applicable large employers can offer opt out payments and many employers do. However, there are some legal (and other) considerations.
First, ALEs are subject to the Medicare Secondary Payer rules. These rules prohibit large employers from offering any incentive to an employee to drop employer coverage in favor of Medicare. So if the employer has any employees eligible for Medicare, and they offer that employee $50 a month to drop the employer coverage so they can sign up for Medicare, the employer will violate the Medicare Secondary Payer rules. This can result in significant penalties, in addition to Medicare only reimbursing the employee on a secondary basis assuming the employer’s plan is primary.
Second, many employers struggle with these programs when an employee opts out, but then mid-year has a HIPAA special enrollment right, and the employee opts back into the plan. The employer has to be prepared to then lower the employee’s monthly wages once the person opts back in.
Third, these programs tend to cause adverse selection. The healthy employees opt out of the plan and take the cash, which then hurts the group’s experience and will adversely affect future costs.
Finally, the employer should consider the impact of the opt-out payment on the affordability of its premiums for the medical plan. If the opt-out is unconditional, meaning an employee just has to opt out of the employer’s plan to get the cash, then the opt-out incentive must be included in the cost of coverage for ACA affordability purposes.