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“Cash in Lieu of Benefits” Considerations


  11:03:00 pm, by MedBen5   , 479 words,  
Categories: Health Care Reform, IRS

“Cash in Lieu of Benefits” Considerations


With many employers updating benefit packages effective January 1st, it is easy to overlook certain basic benefit options. Offering cash in lieu of benefits is a growing trend among employers, especially those considered Applicable Large Employers (ALE) under the Affordable Care Act (ACA). While it is still permissible to offer a cash incentive to employees who opt out of the employer’s group health plan, there are several important things to understand and consider before implementing or renewing such a program.

  • First, remember that any cash benefit provided to an employee will always be taxable. This rule applies no matter what type of cash option arrangement the employer implements. (Note that benefits provided through a Section 125 plan are subject to different rules.)
  • The “cash in lieu” amount must be counted in the affordability calculation determination under the ACA if the opt-out arrangement is deemed “unconditional” by the IRS. An “unconditional” opt-out arrangement is one in which payment is made to the employee based solely on the employee declining the employer’s offer of group health coverage. In this case, the employer must report the opt-out payment in addition to the standard employee contribution amount as that employee’s cost on line 15 of Form 1095-C.
  • If the offer of cash in lieu of enrollment is “conditional,” the amount does not need to be included in the ACA affordability calculation. The IRS defines a “conditional” opt-out amount as a payment made to the employee only if the employee satisfies a specific condition – generally, the requirement to show evidence that the employee is covered under another health plan or other insurance coverage.
  • The cash option cannot be provided by the employer to enable the employee to buy an individual policy either on or off of the Marketplace (Exchange).
  • The cash option must be offered to all eligible employees (or employees who are eligible as a specific class of employees) in the underlying group health plan. Other IRS rules prohibit an employer from applying the cash option to highly compensated employees only or just those with high claims.

Cash option arrangements can take several forms. An employer may offer cash on a dollar-for-dollar basis with the contribution amount the employee is foregoing. The cash amount might also be a percentage of the employer’s cost of the group health plan.

Two other things should be considered by the employer before implementing such an arrangement. First, if the cash option arrangement is popular with employees and many take the option instead of enrolling in the health plan, there may be an adverse impact on stop-loss insurance participation requirements. Second, if the cash option arrangement is found to be unconditional, employees who receive these payments can add them to the amount they can claim as their premium obligation when applying for a Marketplace (Exchange) subsidy or premium tax credit – leaving the employer with a potential ACA penalty payment.

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