Health Coverage: Cash Vs. Contribution/Cash-Out Amount
Q: Does an employer’s cash-out option (i.e., cash-in-lieu of benefits) have any impact on the coverage’s affordability under the employer mandate?
A: Yes. As background, under the employer mandate, the employer must offer at least one affordable, minimum value plan to all full-time employees, or risk a penalty.
Affordability is based on the cost to the full-time employee for single-only coverage. Generally speaking, coverage is affordable if the cost of single-only coverage does not exceed 9.5 percent of that employee’s W2 wages or 9.5 percent of that employee’s rate-of-pay. (There is also a way to determine affordability based on the federal poverty line.)
Cash Vs. Contribution or Cash-Out Amount
The regulations on affordability, as well as general tax rules for similar benefit issues, seem to indicate that cashable flex credits in a Section 125 plan (i.e., those that can also be received as additional taxable compensation) should be treated as employee contributions toward coverage, meaning the credits would not count toward affordability. The cash-out amount is viewed in the same light as a flex credit. That means the cash-out amount would be added to the amount that the employee was paying toward coverage (making it more difficult to meet affordability, since the employee’s required contribution would increase).
To help explain the concept, if the employee can take the cash instead of the contribution/cash-out amount, there is no guarantee that the employee will use that cash to pay for medical care. The cash-out actually becomes the employee’s money, and therefore would be considered an ‘employee contribution’ towards coverage. Since it is possible the amount would not be used towards coverage, the amount would not count towards affordability. This appears to be the case even if the employee does not actually elect the cash-out option. Conversely, if the employer contribution or cash-out cannot be taken as cash and must be used toward coverage, the amount is viewed as an employer contribution (since there is no method by which the employee could take it as cash and spend it elsewhere) and would count towards affordability.
As an example, an employee whose required employee contribution for health coverage is $100 per month, but who is eligible for opt-out credits of $50 per month if coverage is waived, would be treated as having coverage with a required employee contribution of $150 per month when determining whether coverage is affordable. In other words, the cash-out option amount would be added to the employee premium cost when determining the cost of single-only coverage.
Based on the above, employers that are subject to the employer mandate should review their employer contribution strategies. If the employer offers a cash-out option, the option should be reviewed to ensure it is not adversely affecting the affordability calculation. Overall, employers should work with tax counsel and their advisor in devising contribution structures that yield affordable plans for their full-time employees.
Section 125 Plan & the Cash-Out Option
Although not directly related to the employer mandate, employers should also remember that a cash-out option must be offered through a section 125 plan. That means the Section 125 rules apply, including the written plan document and irrevocable election rules (elections cannot be changed mid-plan-year absent a qualifying event). Many employers will already have a Section 125 plan in place, and will have to add the cash-out option to the list of benefits available through the Section 125 plan. In addition, the Section 125 nondiscrimination rules apply, meaning the cash-out option could not be offered in a way that discriminates in favor of highly compensated employees.
Lastly, the cash-out option should not be offered only to those who can prove they have coverage elsewhere (e.g., through another employer, a spouse’s employer, Medicare, etc.). Such a design removes the requisite Section 125 ‘choice’ that is required for all employees to have in order to make an election between cash and non-taxable benefits, such as premium payments.