May 9, 2018
For employers who are considering providing opt-out payments to employees for waiving medical coverage, there are Internal Revenue Service (IRS) rules that must be followed. The IRS rules provide that opt-out payments are treated differently when they are conditional as opposed to unconditional. Explanations of conditional and unconditional opt-out payments will be provided below. In addition, the Ninth Circuit Court of Appeals made a ruling regarding the calculation of overtime under the Fair Labor Standards Act (FLSA) when opt-out payments are made to employees (Flores v. City of San Gabriel). The U.S. Supreme Court was petitioned to review the Flores v. City of San Gabriel decision, but denied the petition in May, 2017. Employers providing an opt-out payment in the eight states governed by the Ninth Circuit Court of Appeals must follow the decision regarding the handling of opt-out payments and the calculation of overtime. Those in other states are advised to watch for future developments in other jurisdictions.
IRS Notice 2015-87 addresses the impact of employer opt-out payments on affordability under the Affordable Care Act (ACA).
Employers who do not offer group health coverage that is deemed affordable under ACA may be subject to significant penalties. Whether or not the opt-out payment affects the calculation of affordability is determined by the type of opt-out payment provided to employees.
The opt-out payment may be unconditional or it may be conditional. “Unconditional” is one where the employee is not required to provide substantiation of other coverage in order to receive the payment. “Conditional” is just the opposite… the employee is required to provide substantiation of other coverage to receive the payment. This would include coverage under a spouse’s group health plan, but would not include individual market coverage. When opt-out payments are unconditional, the IRS states that the payment increases the employee’s cost of coverage, therefore, unconditional payments impact affordability. Conditional opt-out payments do not affect affordability under the rules.In order for a conditional payment to be made to employees under an eligible opt-out arrangement, and therefore, not affect affordability, the conditional payment must meet two requirements.
First, the employee is required to decline the coverage that is sponsored by their employer. Second, the employee must provide substantiation that they have minimal essential coverage from another source, again, not the individual marketplace.
IRS Notice 2015-87 can be found on the IRS website at: https://www.irs.gov/pub/irs-drop/n-15-87.pdf
As mentioned above, the Ninth Circuit Court of Appeals ruled in Flores v. the City of San Gabriel that opt-out payments must be included in the regular rate of pay and therefore in the calculation of overtime rates. In this case, a group of police officers sued the City of San Gabriel for three years of unpaid overtime as well as liquidated damages under the FLSA. The FLSA states that overtime hours must be compensated at a rate of at least one-and-a-half times the employee’s hourly “regular rate”. Generally, all forms of remuneration and compensation for employment paid to an employee would be included in what is defined at the “regular rate”, unless it is specifically excluded under law (29 U.S.C. sec 207(e)). The City of San Gabriel calculated overtime for the police officers without taking into account the cash in lieu (opt-out) payments as part of the regular rate calculations. The court found that the practice by the City of not including the payments in the regular rate, and therefore, in the overtime calculation, was willful, and the police officers were entitled to three years of back pay.
For further information on the Flores v. City of San Gabriel case, please visit: https://law.justia.com/cases/federal/appellate-courts/ca9/14-56421/14-56421-2016-06-02.html
Employers should remain alert that it is possible that other districts may look at this case and may rule in kind. The Department of Labor (DOL) could follow suit at the federal level requiring all employers who provide such opt-out payments into consideration when calculating overtime.
If you would like to learn more, start a conversation with us.
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