If an employer wants to offer a higher salary to a subset of employees if they waive coverage, would the increased salary impact ACA affordability? What about non-discrimination testing? My understanding is that, while they could take this approach, it may be risky and a more formal opt-out credit arrangement may be a safer option. Would non-discrimination come into play if the additional compensation changed the individual’s status to highly compensated individual, or would it depend on how the amount of salary increase they receive for waiving coverage?
Employers can increase the salary of employees who choose not to take benefits. Since the employee’s compensation is higher, it will impact affordability, unless it is an eligible opt-out arrangement. An “eligible opt-out arrangement” means that the opt-out payments are available only to employees who (a) decline employer-sponsored major medical coverage, and (b) provide reasonable evidence that they and their “expected tax family” have or will have minimum essential coverage other than individual market coverage during the plan year. Proposed regulations provide that payments available under that arrangement would not increase the employee’s required contribution for purposes of determining affordability. In other words, the amount of the opt-out payment is not included in determining whether the offered coverage is “affordable” for ACA purposes. That treatment applies whether the employee enrolls in the employer’s plan or receives the opt-out payment.
The two biggest issues with this strategy are the Medicare Secondary Payer rules and HIPAA’s special enrollment rights. Under the MSP rules, employers with 20 or more employees cannot incentivize an employee to not take the employer’s benefits and instead sign up for Medicare. Opt-out bonuses or increasing compensation are improper incentives to this population. With respect to HIPAA’s special enrollment rights, the employer may be faced with having to reduce someone’s compensation mid-year if they initially opt out of benefits, but then enroll in the middle of the year due to a qualifying event.