Cash in Lieu of Benefits: Not So Fast…
Employers have often offered their employees cash in lieu of enrolling in the employer-sponsored benefit plans. Some employers want to offer something to those employees who choose not to take advantage of the health benefits they make available; so, they can have similar compensation as those employees that choose to participate. Others do it to incentivize employees to make use of other plans they have available to them, such as through a spouse or parent’s plan. The cash compensation is often less than what the employer would otherwise spend for them to enroll in the benefit plan. Some simply see it as a job perk and a helpful way to recruit and retain employees.
However, what seems simple on the surface is far more complicated. Dive in as we explore some of the difficulties of offering cash in lieu of benefits before deciding on this course of action.
The Legality of Cash in Lieu of Benefits
The first thing to remember with any kind of employee benefit is that it must be offered on an equal basis to all similarly situated employees (e.g. all full-time employees, all employees working in one particular state, or management employees). Keep in mind that whatever classification is used, that classification must exist for a bona fide business reason besides benefit eligibility.
During the Reagan administration, Medicare was in dire trouble. As a result the Medicare Secondary Payer rules were enacted to relieve some of the financial strain. One of the things these rules state is that any employer with 20 or more employees cannot incentivize employees who are eligible for Medicare to dis-enroll from their employer sponsored plan and enroll in Medicare. Offering employees cash instead of enrolling in the offered benefit plan can be seen as an incentive to enroll in Medicare. If the employer only offers cash in lieu of benefits to those under the age of 65, the policy can be seen as discriminatory. Be sure to consult with counsel to carefully craft the plan documents to ensure the policy is not discriminatory and not violating the Medicare Secondary Payer rules.
How to Report Cash in Lieu of Benefits to the IRS & Potential Pitfalls
If an employer is considered an Applicable Large Employer, or ALE, under the Affordable Care Act, they are required to offer health insurance that meets the minimum value and affordability standards set forth in the law to their full time employees; if they do not offer this, they could potentially face a penalty. Generally, an ALE is an employer with 50 or more full-time and/or full-time equivalent employees. An ALE is also required to report to the IRS regarding their employees and whether the required offer of affordable coverage was made. This reporting is conveyed through the IRS 1094-C and 1095-C forms. The 1095-C form requires that the employer disclose the monthly premium cost to the employee for enrollment in the lowest plan offered that meets the minimum value standard.
If an employer offers cash in lieu of benefits the IRS considers that amount to be a cost to the employee who chooses to enroll in the employer sponsored coverage. For example, if the base plan costs an employee $200/month to enroll and the employer offers employees $300/month if they choose not to enroll in the employer sponsored plan, the employer must report $500/month as the cost to enroll in coverage. The reason being the employee who enrolls in coverage and pays the monthly premium is also losing the $300 they would otherwise be receiving. This could cause the plan to be deemed unaffordable under the standards set in the Affordable Care Act, potentially resulting in a penalty to the employer.
Lastly, Flores v. City of San Gabriel, 824 F.3d 890 (9th Cir. 2016) under statutory interpretation of the Fair Labor Standards Act found that cash in lieu of benefits payments was considered compensation for work, regardless of whether the payments were attributable to specific hours that were worked. This ruling means that any employer who offers cash in lieu of benefits must include the cash benefit amount when calculating overtime compensation rates for non-exempt employees.
Any cash an employee receives for not enrolling in the benefit plans offered is considered taxable compensation, something both the employer and employee should keep in mind as it increases the cost for both parties above the simple cash amount.
AEIS – Your Benefits Guide
In short, when an employer wants to offer cash in lieu of benefits because it seems like a simple way to beef up their benefits package, they should think twice as it is not nearly as simple as it sounds.
If you’re looking for assistance with your employee health benefits plans, AEIS is here as a trusted advisor, advocate, and strategist. With over 35 years of expertise, we are ready to help you find real solutions to your most pressing benefits questions for an easier, more complete, always compliant plan.
Contact our team today and let us know how we can help you!
