Can Employers Offer “Cash in Lieu of” Instead of Benefits?

Offering health insurance benefits can be an expensive proposition for employers since they often pay for some of their employees’ coverage premiums.  For some employees, coverage is not always wanted or needed, as they may have existing coverage elsewhere that they would prefer to keep.  In these circumstances, a “cash in lieu of” benefits option (where employers provide cash instead of benefits) can be attractive.  But is this option legal?  The short answer – yes.  But there are specific compliance obligations that employers should consider before implementing this option.

Complying with Section 125 of the Internal Revenue Code

Employers may offer a “cash in lieu” of option to their employees only through an Internal Revenue Code Section 125 plan (i.e., a “cafeteria plan”), which provides nontaxable benefits such as health insurance.  However, “cash in lieu of” benefits are taxable, so that cannot be the only option offered to employees under the cafeteria plan.

In addition, “cash in lieu of” benefits must be a consistent figure offered to all eligible employees, and cannot change based on employee salary, tenure, or role with the company.  And “cash in lieu of” benefits are taxable, so employers must report them as wages on employees’ W-2’s.

Affordable Care Act (ACA) Compliance Requirements

For “applicable large employers” (i.e., those with 50+ full-time employees), their group health plan must satisfy the ACA’s “affordability” standard, which is 9.78% for 2020. For plan year 2020, this means that an employee’s share for self-only coverage cannot exceed 9.78% of his or her household income.  As such, the “cash in lieu” of benefits amount must be included in the affordability determination, unless it is an “eligible opt out arrangement.” For the “cash in lieu of” option to be considered an “eligible opt out arrangement,” the employee must waive in writing the employer-sponsored coverage, and must attest annually that he/she has Minimum Essential Coverage (MEC) from a source other than an Individual & Family Plan.  “Cash in lieu of” benefits cannot be used by the employee to purchase health insurance on their own.

Fair Labor Standards Act (FLSA) Implications

Employers should be aware that some federal courts have ruled that “cash in lieu of” benefits are wages that must be factored into overtime compensation for non-exempt employees under the FLSA.  This means that employers must include “cash in lieu of” benefits when determining the employee’s regular rate of pay for purposes of calculating the “time-and-a-half” overtime rate for all hours worked in excess of forty (40) per workweek.