Cash in Lieu of Health Coverage

Clients often ask us about offering an employee extra pay if the employee doesn’t enroll in health coverage and candidates will sometimes ask about this as well when they negotiate compensation.  Sounds like a potentially easy way to increase an  employee’s compensation in a cost neutral way for the organization, but it is far from simple.

In general we recommend against these plans because:

• They need to be offered uniformly and fairly to reduce liability;
• In the absence of a formal plan, the employee can always opt into the group health plan later; and
• Why incur the expense unnecessarily?

The company is offering a benefit option not an entitlement of certain compensation value.

What’s the Background?

A growing number of employers are offering a “cash in lieu” (CIL) or “pay in lieu” of benefits option, under which the employer offers an employee a taxable “opt out” amount if the employee declines coverage under the employer’s group health plan.  While a CIL arrangement may be an option for some employers, it is critical that the employer make the choice of benefits or cash available only through a cafeteria plan or the employer could potentially violate FLSA and ACA.

Just the Facts, Please

Here are some facts on how to write a technically compliant Cash in Lieu program:

• The CIL must be a written arrangement under the employer’s Section 125 plan.  It should not be an ad hoc arrangement to be made when hiring a new employee or during open enrollment.
• The option should be offered through a cafeteria plan so employees who elect group health plan coverage will not have taxable income.  If an employee has the choice between cash or a nontaxable benefit like health insurance, the employee is taxed on the cash amount UNLESS that election is made through a cafeteria plan.
• Employees must all have the ability to choose whether to enroll in the offered benefits orreceive cash.
• The cash option should be uniform.  It must meet the Section 125 nondiscrimination requirements, should be offered to all eligible employees, not just a select few, and should not be offered primarily or exclusively to employees who have high claims.
• The option should not be provided to enable an employee to purchase an individual policy, whether on or off the exchange.  ACA rules do not allow this.

What Are Some Risks I Need to Consider?

• Individual Health Insurance – While technically still permissible under the Affordable Care Act (ACA), offering cash in lieu of waving benefits does create compliance concerns and is a plan design feature that conservative employers may want to reconsider. Where an employer requires proof of other coverage in order to receive the cash, and if that other coverage can be individual coverage, regulators have informally indicated that this practice may be inconsistent with the new ACA rules prohibiting employers from paying for employees’ individual coverage.
• ACA Compliance – If an employer wants to offer this as an option, guidance should be sought from an attorney, broker, or consultant to be sure there is no violation of the ACA.

We Can Help

Insource’s HR consultants are professionals with industry-specific knowledge and experience who can help structure incentive and benefit programs and address other HR matters.  We offer general HR management services and these services are billed hourly so you can work with us as much or as little as you need.  We talk with you about your business needs and challenges and can work with you to evaluate personnel policies and practices that may create risk for your company.

As head of Insource’s HR Consulting Practice, Saleha leads the Human Resource Consulting Practice and is responsible for the overall management of client engagements and providing strategic direction of the practice.  If you have questions regarding our HR management services, please contact Saleha via email at swalsh@insourceservices.com or at 781-374-5103.

This blog is for informational purposes only.  Insource is not a law firm, and nothing contained herein shall be construed as rendering legal advice.