Can Employers Offer Cash in Lieu of Benefits?

Health care is expensive and complicated. So can employers instead offer their workers cash in lieu of benefits? That might be even more complicated.

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Can I offer cash in lieu of benefits?

Offering health insurance to employees is a great way to provide value and retain a skilled workforce. But since offering high-quality health insurance can be extremely expensive, some employers may consider offering cash in lieu of benefits– that is, instead of offering traditional health insurance packages. But is this really the easier route? Here’s what you need to know about this option– and why you might want to be cautious. 

Can an Employer Offer an Employee Cash in Lieu of Benefits?

It is possible to offer employees compensation instead of a group health insurance plan. This money could also be used to pay for additional health costs that the employee may have, all at a lower cost for the employer who doesn’t have to add another individual to a group plan.

To legally offer cash in lieu of benefits, employers must adhere to the following three codes:

1. Internal Revenue Code (IRC) Section 125

Section 125, also called the Cafeteria Plan, is required so that employees who receive health insurance options aren’t discriminated against. In particular, the cafeteria plan document requires that employees offer all options to all employees so that they can make informed health insurance choices.

2. Affordable Care Act (ACA)

With the ACA, employers are required to comply with the Employer Shared Responsibility code. This means that employers must make sure that employees aren’t using the cash to enroll in individual health insurance plans. Asking employees to show proof of group coverage elsewhere can help employers comply with this law, as it can show that they’re not using cash to enroll in or pay for an individual health plan.

3. Fair Labor Standards Act (FLSA)

With FLSA, employers are asked to differentiate between regular pay and overtime pay, ensuring that the cash isn’t included in overtime benefits. This is unless the benefits pay is explicitly excluded from regular pay, as defined by the employers.

What are the pros and cons of this option?

The cost-saving benefits of offering cash in lieu of benefits can make it an attractive option for many employers. However, the downsides might outweigh the positive aspects of this approach. For example, failure to comply with the above three regulations can result in hefty fines and penalties.

And from a recruitment and retention standpoint, a good benefits package is incredibly attractive to job candidates, so offering cash might not be the way to hire the best people for your organization. Check out more compensation best practices here.

Also, the ACA currently helps define the laws and regulations regarding this approach. Yet, with the repeal and replace discussions of ACA in place, this can be even more confusing and inconsistent for employers trying to navigate the space for the first time.

Moreover, individuals aren’t supposed to use these funds to purchase their own health insurance, which might defeat the purpose of providing cash in lieu of benefits.

This is especially true when employers aren’t covered by another group plan, and they’d prefer to be covered on your group plan. When some of your employees are receiving cash in lieu of benefits, and others are receiving group plan payments, it can be much more stressful and detail-intensive than simply offering group health plans to everyone. 

Please note that this does not constitute legal advice and we recommend you consult your own legal counsel when drafting benefits policies (see our Help Center content for outstanding questions).

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