Cash In Lieu of Benefits Plan - Two Cautions

Cash In Lieu of Benefits Plans – Two Cautions

Offering cash in lieu of signing up for the employer benefit plan is a practice that has been around for some time, and continues to be popular with some employers.  The decision to offer (or continue to offer) this type of benefit has recently become more complex.   You may be aware that there are ACA Implications, but did you know that a cash in lieu plan may also have an Overtime implication?  Here’s a quick summary of both topics. 

1. ACA implications:

The ACA implications have been around awhile now, so we’ll just touch on it briefly.   If you are an “applicable large employer” (ALE), and subject to the employer mandate, you may be subject to penalties if your health coverage is not “affordable.”  Coverage is “affordable” if the employee’s required contribution for self-only coverage does not exceed 9.66% (for 2016) of the individual’s household income or one of the three safe harbor amounts.  Although the IRS has not given specific guidance on how Cash In Lieu plans affect affordability, other IRS guidance (such as 26 CFR 1.5000A-3(e)(3)(ii)(E)) implies that if an employee takes the employer provided coverage, and therefore does not get the cash in lieu payment, that opt-out amount may be considered part of the employees required contribution in the affordability determination.  (In particular, this applies to unconditional opt-out plans, where the employee does not have to show that they are signing up for group coverage elsewhere.) You could almost consider it an opportunity cost.  By taking the insurance, they are giving up the cash, which therefore increases the “cost” of the coverage. 

Here’s an example: 

Company XYZ offers medical coverage and an unconditional opt-out option through a cafeteria plan.  If Employee Joe takes the insurance (employee only coverage), he will pay a premium of $50 per month.  Or he can opt out of the insurance and take the opt-out payment, which is $60.   Here’s the catch, if Joe takes the insurance, under the ACA he might actually be treated as having a required contribution of $110 ($50 + $60) when determining if his coverage is “affordable.”   If it is not “affordable” under the ACA guidelines, Company XYZ maybe be subject to penalty.

To learn more about the ACA implications, contact a benefits attorney or your benefits agent.

2. New Consideration – Overtime!

As if the ACA implications were not enough to think about, there may also be an overtime issue. The Ninth Circuit (generally speaking covers West coast/western states) has recently ruled that cash payments made in lieu of benefits need to be included in employee overtime calculations.  In the Flores v. City of San Gabriel case, City police officers had the option of getting a cash payment if they opted out of some or all of their benefits.  The court held that this payment was “compensation for services” and must be included in the regular rate of pay for overtime purposes.  This is the first time this particular issue has been addressed in any court.    

This is a Ninth Circuit case, so it’s implications for Wisconsin (7^th district) are yet to be determined.  As other courts take up this question, they may or may not adopt the same logic as the Ninth Circuit did in this case.  It is interesting to note that the City had additional penalties because they had “willfully” violated the law because they did not research the law thoroughly enough, even though no case law existed at that time.   This issue bears watching, as there really isn’t any other case law yet that addresses this question.  So the Ninth Circuit decision is now the only precedent available. For now, if you offer a cash in lieu plan, even if you are not in the Ninth district, getting an opinion from your attorney regarding overtime may be a prudent move.

You can find the Flores v City of San Gabriel opinion here

Cash in lieu of benefits plans are still an option worth considering, but employers need to practice due diligence to ensure they are aware of all risks and implications.   What started out as a nice, and easy, benefit for employees (and potential cost saver for employers), has turned in to something a lot more complicated.  Reaching out to your resources, and doing a little homework, can help you maintain a solid (and compliant) benefits program.

MORE INFORMATION:

If you have questions about cash in lieu of benefits plan or how it may impact your business, please contact your Hausmann-Johnson Insurance partner.

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