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How cash in lieu could really screw you

I was recently asked if an employer can offer cash in lieu if the employee uses it to purchase individual coverage. And secondly, can they give the entire amount that the employer would have otherwise spent if they enrolled on the group plan?

Here are some reasons why you don’t want to do either of these things.

1: You can only allow someone to join your group health plan outside of annual open enrollment with a qualifying event that triggers what is known as HIPAA Special Enrollment Rights.

You do not have special enrollment rights for dropping an individual plan, nonpayment of individual premium, shrinking of their medical network, a scary diagnosis, etc. So your employees who lose or cancel their individual plans thinking they can come onto your benefits are going to be locked out until the next open enrollment.

2: Your employees may choose poorly and find themselves exposed to catastrophic health costs.

You have an employee I spoke with yesterday who is taking his allowance and buying a non-ACA compliant health expense reimbursement product. It was marketed heavily in his state and he thought it was ‘real’ insurance. He went for a physical yesterday and found out that the preventive care wasn’t covered. What’s worse and he doesn’t quite understand but if his physical came back with anything real, his ‘insurance’ is really just a capped reimbursement plan that might pay up to $500k or $1m in claims. Then he is on his own.

3: You jeopardize your ability to get competitive quotes for your medical plan. If too many people waive and buy cheap-o health insurance, you may not meet the carrier’s minimum participation requirements. Individual health insurance is typically not a valid waiver when counting the eligible headcount. You might be able to squeak in during the special enrollment window in November/December where the carriers have to waive most of their rules, but they’d have the right to recertify you down the road.

4: If only highly compensated employees stay on the plan you could fail the Section 125 nondiscrimination testing and the benefits your company pays for become taxable for everyone. Retroactively.

5: Giving them money to go buy their own individual insurance is considered an Employer Payment Plan and exposes you to $100/day per employee penalty for violating the ACA! And your employees would need to apply the amount you pay them against any federal tax credits they are receiving to purchase insurance.

6: Hassle factor. At least annually you need to have your employee provide reasonable substantiation that they have benefits from somewhere other than the individual marketplace or Medicare. If you really want to go this route, and not offer any other medical benefits, then talk to me about using a Qualified Small Employer Health Reimbursement Account with an administrator to keep you in compliance.

6: Based on recent legal cases, a cash-in-lieu amount that is too high could be deemed compensation under FLSA and not an ERISA plan so you could be exposed to back pay and increase overtime costs.

I generally recommend you provide a small amount, enough for your employee to think twice about signing up for double insurance on both your plan and a spouse’s plan, especially since in the Bay Area some companies are paying 100% of employee and dependent costs. But don’t pay so much that you are basically bribing your employees onto another employer’s plan or paying them so much they consider it part of their take home pay.

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