One dynamic of the complex era of the Affordable Care Act ("ACA") is that many longstanding, common plan design approaches are analyzed with more scrutiny than before. A recent example involves the use of “waiver credits,” the concept whereby an employer offers an incentive to an employee in order for the employee to waive participation in the group health insurance plan on behalf of himself/herself, or on behalf of a spouse or dependent(s).
Waiver credits have long been allowed, and they take various forms. Some employers pay waiver credits in cash (taxable compensation). These cash credits may be dollar-for-dollar, or they may be a defined dollar amount of percentage of what the employer would have paid toward the employee’s group health plan coverage. Other employers allot waiver credits toward benefits other than medical – dental, vision, Flexible Spending Accounts, worksite benefits, 401(k), etc. One advantage to using the credits toward items other than cash is that the credits can potentially be used for non-taxable purposes, benefiting both the employee and the employer. Where utilized, regardless of specific credit design, a properly compliant waiver credit is incorporated into the employer’s Section 125 plan for pre-tax premiums.
In light of current ACA and compliance complexity, we have received a number of recent questions regarding the continuing viability of waiver credits. The short answer is that waiver credits continue to be a compliant plan design mechanism under Section 125 and ACA rules, and there are many plan design options for employers. The basic rules have not changed, and employers of all sizes may consider waiver credits as part of their group health and overall benefits planning.
There are several important considerations for employers designing and applying waiver credits. First, while it is attractive to many employers to reduce employee enrollment (overall cost), utilizing waiver credits could have an adverse impact on insurance carrier participation requirements, thus affecting overall plan rates. This is not a factor for waiver credits involving spouse or dependent coverage.
A second consideration applies to Applicable Large Employers – employers that are subject to the employer mandate in 2015 (100+ employers) or will be in 2016 and beyond (50+ employers). Specifically, the concern is the affordability standard that applies to the employee’s portion of employee-only coverage. Recent ACA guidance issued in December indicates that a cashable waiver credit could be a factor in an Applicable Large Employer's affordability analysis. Specifically, that the amount of a waiver credit may have to be added to the effective premium charged to employees, and thus affecting the employer’s analysis of affordability as it seeks to avoid any potential penalties under Section 4980H(b) of the employer mandate. This analysis is not final, but it is a factor that should be considered for 50+ employers that currently have or later consider a waiver credit.
For employers under 50 that are exempt from the employer mandate, the affordability analysis is not an issue. However, those employers may have more stringent participation requirements with the carrier.
There are many plan design options and alternatives to cash, and it is our view that waiver credits will continue as a viable plan design tool for employers seeking to accomplish specific goals.