What if you hire a new employee, who rejects your offer of health benefits because they want to stay on their spouse’s plan and they ask for a higher rate of pay instead?

The “employer shared responsibility” requirement of the Affordable Care Act bars employers – with the threat of a $36,000 penalty – from giving an employee cash with which to purchase health insurance on their own.

But how about if you are just increasing their pay based on the fact that you are not shelling out a higher amount for the employer portion of their premium?

Employment law attorneys have been receiving more queries about how to deal with such a request, and in this article we’ll explore how employers can legally do so as long as they are willing to deal with the downsides and potential for conflict with regulators.

To make sure they protect themselves, some employers require employees that opt out of the company health plan to certify that they have other coverage. This is also a questionable move that can have certain ramifications for employers.

It is legal to offer employees cash in lieu of health plan benefits, but it has to be done appropriately through a cafeteria plan that includes a “cash-in-lieu” agreement. If they opt out for cash in the agreement, they will be taxed on those funds as if they were wages.

Just remember that:

  • Cash should not be provided to enable an employee to purchase an individual policy in the open market or an exchange.
  • The written language of your cafeteria plan must clearly state that each eligible employee has the option to either enroll in the benefits or receive cash.
  • The agreement must be under the auspices of your Section 125 cafeteria plan. It cannot be an oral arrangement. The language in your plan must include wording explaining that only those employees who choose the cash option will be taxed on the cash that they receive.
  • The cash amount must be uniform for all employees. If not, you could be creating another problem for yourself: that your plan could fail the non-discrimination test of the ACA.

Don’t make this mistake

Do not give employees cash to purchase their own plan. This is what’s known as an employer payment plan, which could result in a penalty of $100 per day per employee (or $36,500 per affected employee).

If your cash-in-lieu arrangement is not codified in your cafeteria plan, you open yourself up to legal problems. If it’s not couched as a Section 125 plan, all eligible employees will be treated by the IRS as if they had taken the cash option, regardless of whether they did or didn’t. That means those who didn’t choose it would still be saddled with a tax debt on the cash they didn’t receive.

What you should do

If you offer or are planning a cash-in-lieu arrangement, you should talk to us or an employee benefits attorney first. You need to make sure that:

  • You are not opening yourself up to scrutiny by regulators or the tax authorities, and the resulting penalties.
  • You ask if you should require that employees sign a statement affirming they have coverage from another source.
  • The option does not result in employees who opt in to your group health plan being taxed.
  • You offer the option only through a cafeteria plan.
  • Your Section 125 plan document is updated with the appropriate language to show that employees choose either to enroll in benefits or to receive cash.
  • Your plan-related materials are updated to ensure that the option is disclosed to all eligible employees.
  • All written waivers for coverage include the cash-in-lieu option, and that employees clearly indicate that they are waiving coverage that the employer has offered as required under the ACA and the employer mandate. 
  • You offer the opt-out option to all eligible employees, not to just a select few.