Employers commonly ask brokers if they can offer a cash payment to an employee in lieu of paying for that employee’s benefits. This option is permitted, and it is referred to as a “cash in lieu of benefits” option (or a “pay in lieu of benefits” option). However, there are compliance aspects brokers need to be aware of when guiding an employer through this option.
In these arrangements, the employer can offer a taxable “opt out” amount to an employee, if the employee waives coverage under the employer’s group plan because that employee has other group coverage (e.g., a spouse’s plan or parents’ plan).
When a “cash in lieu of benefits” plan is offered, the option will always be taxable. The option should also be offered to employees alongside a Premium Only Plan (POP), which allows employees to choose the taxable “cash in lieu of benefits” option, or choose to use pretax dollars to fund their share of health insurance premiums.
When “cash in lieu of benefits” is offered to employees, the benefit cannot discriminate to employees based on “would-be” premium costs. Thus, the “cash in lieu of benefits” amount should be a single flat-dollar amount set by the employer, and should be consistently offered to all eligible employees. Furthermore, the option should not be provided to enable an employee to purchase an individual health policy.
If the employer offering the “cash in lieu of benefits” option is an Applicable Large Employer (ALE) under the Affordable Care Act (ACA) – that is, the employer averaged 50 or more full-time plus full-time-equivalent (FT+FTE) employees for the twelve months of the preceding tax year – special requirements apply. The “cash in lieu of benefits” amount must be included in the affordability determination, unless that option is considered an “eligible opt out arrangement.” In order for the option to be considered an “eligible opt out arrangement,” the employee must waive employer-sponsored coverage, and must attest annually that he/she has Minimum Essential Coverage (MEC) from a source other than an Individual & Family Plan.
An example: The premium for the lowest-cost minimum value plan is $400/month. The employer contribution is 50%, so the employee pays $200/month. The employer also offers all eligible employees $100/month as a “cash in lieu of benefits” amount if they decline coverage.
- If the $100 “cash in lieu of benefits” amount must be counted into ACA affordability because the “cash in lieu of benefits” option is not considered an “eligible opt out arrangement,” the employee cost for self-only coverage will be $300/month ($200 premium + $100 “cash in lieu of benefits” amount). From the IRS’s perspective, the employee has to forgo the $100/month “opt out” amount in addition to having to pay the $200/month for coverage.
- If the opt out payment does not have to be counted because it is considered an “eligible opt out arrangement,” the employee cost for self-only coverage will be $200/month.
Employers should always include “cash in lieu of benefits” polices in their employee handbooks. This allows for transparency and equal treatment of all employees across the board. It also helps protect the employer against potential ERISA violation concerns because of this transparency and fair treatment.
If employers feel uncertain setting up a “cash in lieu of benefits” option, it is best to refer them to legal counsel or a CPA to ensure full compliance with the law.