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Cash in lieu of benefits: Considerations for employers

August 17, 2017

By Lori Stewart, SPHR®, SHRM-SCP, HCS, Partner, Human Resources Consulting

Cash in lieu of benefits has become a popular practice for employers looking to curb costs of their group health plans. The intent is to offer employees a cash option relating to benefits when the employer-sponsored plan does not meet their needs. Typically, employees who opt for cash in lieu of benefits are covered on a spouse’s employer group health plan. The cash in lieu of benefits incentive is typically less costly to the employer than if the employee were to enroll in the group health plan, and the cash option also happily meets the employee’s specific need. Thus, the cash in lieu of benefits option can be both an employee morale advantage and cost advantage for the employer.

Although the cash in lieu of benefits practice is legal, there are a number of considerations to ensure compliance with regulations, in particular the Internal Revenue Code (IRC) Section 125, the Affordable Care Act (ACA) and the Fair Labor Standards Act (FLSA).

What to consider when considering cash in lieu of benefits

IRC Section 125 Compliance Considerations

The cash in lieu of benefits option must be offered through a Section 125 Cafeteria Plan, to not disqualify all other employees who elect health coverage through the cafeteria plan. If the IRS discovers an employer is not operating their Section 125 plan compliantly, all employees participating will be disqualified. Disqualification means each person will need to pay premiums on a post-tax versus pre-tax basis. The IRS can require the employer to re-do these calculations historically, not just within the same plan year.

The non-discrimination provisions within IRC Section 125 require all available options be offered to all participants, not just a select few. The cafeteria plan document should outline the parameters of the cash in lieu option, and annual election forms should also be adjusted to include the cash in lieu option.

ACA Compliance Considerations

The cash in lieu of benefits option is to be considered within the parameters of the Employer Shared Responsibility provisions of the ACA as well as within IRS guidance about the ACA, which disallows employer payment plans of individual health insurance.

To ensure Employer Shared Responsibility compliance, the monthly cash amount ascribed to the cash in lieu of benefits option is to be added to the monthly cost of the employee contribution to the lowest-cost health plan to determine if the sum is affordable as defined by the ACA. If the sum amount does not meet the affordability guidelines, the employer may be subject to ACA Employer Shared Responsibility penalties.

To ensure an employer is not operating an employer payment plan per ACA and IRS definitions, an employer’s group health and cafeteria plan documents and enrollment materials need to specify that the cash in lieu of benefits option is not to be used to purchase individual health insurance. Many employers require employees to show proof of group coverage elsewhere, to ensure employees are not covered under an individual health plan. The IRS has issued repeated guidance to describe that the employer’s payment of individual health plans is not allowed per the ACA.

In December 2016, the 21st Century Cures Act legislation was passed, which does allow employers to reimburse for individual health policies. However, this practice is only allowed if the employer does not sponsor a group health plan as well.

FLSA Considerations

Within FLSA regulations, cash in lieu of benefits requires careful consideration, particularly as it is considered part of regular pay which is to be included in overtime pay calculations.

The definition of regular pay within FLSA applies to all employers. Related case law highlights municipalities because police and fire workers routinely work overtime. However, all employers are subject to FLSA regulations, which thoroughly outlines what constitutes regular pay, as well as eight exclusions to regular pay as outlined in FLSA Sec. 207(e)(2). Courts have ruled that if a certain type of pay is not expressly excluded from the FLSA regular pay definition, it is to be included in regular pay, and therefore is also to be included in overtime calculations.

Employers with non-exempt, overtime-eligible employees should carefully study the FLSA definition of regular pay when considering a cash in lieu of benefits option. Federal circuit courts, chiefly the 8th Circuit (includes Iowa, Minn., etc.) and the 9th Circuit (Calif. and western states) have narrowly construed the definition of regular pay in favor of employees, putting the burden on employers to prove their adherence to FLSA.

In summary, employers should consider seeking the advice of specialists when considering implementation of the cash in lieu of benefits option. When administered in compliance, employers and employees can realize a healthy return on investment.

For more information or assistance, call 888-556-0123, email hrconsulting@hkpayroll.com  or submit our online form.

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