From the Hotline: Opt-Out Credit

Question: If an employer offers a $50/month “opt out credit” for any benefits-eligible employee not enrolling in the group medical plan due to coverage under a spouse’s group health plan, would that also include employees under age 26 who are covered under a parent’s plan? Are there any tax or ACA implications that need to be considered?

Answer: Yes, an employee’s coverage under a parent’s plan or a spouse’s plan would both be eligible for an opt-out credit in such a situation. In accordance with IRS regulations, the best way to offer the opt-out credit is to include it as a formal “cash-in-lieu” provision under a § 125/cafeteria plan. This provision should be offered to all benefits-eligible employees declining benefits regardless of coverage without restrictions regarding the use of the cash. If the employee elects the cash, it is subject to all ordinary income taxes and employment taxes. This tax treatment has applied for decades and does not change under the Affordable Care Act (ACA) regulations restricting employer payments for individual health plans.