Monday, March 24, 2014

Providing Cash-In-Lieu of Benefits Really Should Be Phased Out Under PPACA

Providing a bonus for employees not to take your health plan was once fairly common. But if you are going to proceed with that tact, you should be aware of the myriad of pitfalls.  The list of gotchas has grown under PPACA, I've detailed a few of them below (this list is not exhaustive):
  • The cash bonus should always be paid for declining a benefit offered through the cafeteria plan. Otherwise, the IRS will deem constructive receipt of pay.  If you have a legal right to a payment but elect not to receive it, the IRS can tax you nonetheless.  The constructive receipt doctrine can trump cash accounting.  Constructive receipt requires you to pay tax when you merely have a right to payment even though you do not actually receive it.  
  • You should structure your cash-in-lieu be paid throughout the year as opposed to an up-front lump sum. This way people that terminate, reduce hours to part-time, or experience some other qualifying event to exit midyear are not being given the same amount of money as those who remain active benefit-eligible employees and waive coverage for the full plan-year.  
  • Under Obamacare, starting in 2015, applicable large employers could be penalized for requiring proof of other coverage before allowing someone to decline an employer plan. And with the new I.R.C 105(h) non-discrimination rules coming, if the declination of coverage is not contingent upon providing proof of other coverage, then the waiver probably shouldn't be predicated upon that proof, either.  But this will depend on how HHS and IRS write the regulations defining other employer coverage under 105(h).  
  • It is incredibly difficult and legally untested as to whether an employer who pays a cash-in-lieu bonus at the beginning of the year can then preclude the employee from exercising his right to a qualifying event and special HIPAA enrollment later in that year. 
  • Under the FLSA, the bonus could actually count toward the "regular rate" of pay used to calculate overtime. 
  • Carriers almost always have participation requirements that are harder to meet if you entice people to leave your plan.  Most carriers require you to have 75% of your full-time, benefit-eligible employees covered under an employer sponsored plan in order for you to remain compliant with your contract terms. 
  • Non-discrimination testing under §105(h) (already applicable to self-funded plans and about to be applicable to fully-insured plans) will generally require you to have 70% of your full-time, benefit-eligible employees on your plan or pay a fine of $100 per non-highly-compensated employee per day.  Every person you "pay" to leave your plan, moves you closer to this catastrophic penalty.  
KC Rippstein, CEBS®, GBA, RHU® contributed to this list via correspondence in a private forum. I've edited, deleted from and added to an earlier version he drafted.

For more on the problems with cash-in-lieu programs see IRS Notice 2015-87 and this post: IRS Confirms That Your "Opt-Out" or "Cash-in-Lieu" Program Must be Added to Employee Contributions.