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Cash in lieu of health insurance-opt out provisions

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8 replies to this topic

#1 Lonnie Tomlin

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Posted 06 January 2000 - 07:59 PM

It has always been my understanding that if you offer an employee cash to opt out of health insurance because the employee had coverage elsewhere, this could only be done under a Section 125 cafeteria plan. Also, IRS had stated to do so causes everyone to have taxable income, ie. the cost of insurance premiums. The purpose of the opt out is obviously to save money because the cash payout was always less than the employer's share of the premium. Am I correct in this assumption and if so what code, reg or notice references are there?

#2 Kirk Maldonado

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Posted 06 January 2000 - 09:42 PM

You are right. It's in the Section 125 plan regulations.

#3 GBurns


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Posted 07 January 2000 - 02:48 AM

I thought you said that an employee could cash out under your Cafeteria plan. I have never seen or heard that this would cause EVERYONE to have taxable income as a result. A cash out option is an integral part of a cafeteria plan and the cash is taxable income only to the employee who takes the cash.

#4 Greg Judd

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Posted 07 January 2000 - 12:08 PM

GBurns is right (as usual)in pointing out that, correctly done, the only person taxed on a cashout is the "cashee"--the person opting out.

Re: "the cash payout was always less than the employer's share of the premium": Here's where many self-funding entities really miss the boat, by equating an underwriter's 'premium equivalent' for what they really would be spending for "opt-outers".

Where the plan's insured, the employer saves a "hard" premium cost. Where self-funded, the employer's only going to save whatever 'real' expenses the opt-outer might generate--and that's normally a LOT less than the 'premium equivalent'. It's sort of like the COBRA situation in reverse. I've seen several self-funded plans pay a over $1,000 to employees opting out, when had they examined their claims data more carefully, they would have found their actual spending on the 'opt out class' was under $300/yr. Net result: plan spends MORE, not less money, gaining nothing from the opt out. Only winners: those reaping the 'opt out' cash windfall.

In my experience, self-funded plans are much better off putting together targeted communications on the subject of dual coverage -- many two-earner families still assume, often mistakenly, that their 'overlapping' coverage is beneficial to them. A good communications campaign may result in the behavior 'opt out strategists' are hoping for, for much less cash outlay.

#5 ronc


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Posted 07 January 2000 - 06:16 PM

In those situations where an employee opts out of the health plan and elects to take the cashout amount, does the cashout amount become taxable compensation? And if so, is that taxable compensation then added to base salary to determine overtime pay? It seems that there was a court case involving this in Penn. last year.

If the cashout amount is fairly small (example $50/month) wouldn't that be de minimus as far as FSLA is concerned?

Also, is everyone requiring proof of other coverage when they allow someone to opt-out of medical coverage?



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Posted 25 April 2003 - 06:13 PM

Opt-out credits then must be part of a safe harbor definition of compensation under 414(s)? If the only HCE in a plan has insurance and therefore does not opt out, the plan is forced to include this opt out credit as part of compensation to determine benefits in order to pass 414(s)?

#7 g8r


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Posted 25 April 2003 - 08:20 PM

I think you should also look at Rev. Rul. 2002-27. The situation was one where employees were "automatically enrolled" in the health coverage and could only elect cash if they "certified" that they had other health coverage. I put the two items in " "s b/c it's not clear whether these are material to the revenue ruling. In particular, the fact that the employer only relied on employee certifications and didn't collect it's own information about whether someone had other coverage was rather interesting (and confusing to me).

But, the IRS held that the arrangement was not covered by IRC 125. Thus, you don't need a cafeteria plan in order for the employees who don't get cash to have an exclusion from income. However, because many people think that is a cafeteria plan, the IRS allows you to treat the amounts paid for insurance as "deemed 125 compensation" for qualified plan purposes. Clearly those who elect cash pay taxes and those who don't have the other coverage (and can't get cash) don't have an inclusion in income for federal tax purposes.

#8 401 Chaos

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Posted 27 November 2006 - 04:54 PM

Does anyone have sample cash-out provision or language from a cafeteria plan document and an election form they would be willing to provide. I cannot seem to find a good model form for such language and want to be sure I'm not missing something. Thanks.

#9 Don Levit

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Posted 28 November 2006 - 10:41 AM

Thanks for providing this Rev. Rul.
It seems that according to the RR, those who elect cash pay taxes, because the employers did not verify the employees actually had their own policies.
If the employers did do this, then Section 125 would not apply, but the employee would not report the premiums paid by the employer as income, right?
Also, do you think the employer could selectively choose to reimburse those employees who certify other coverage, or. would they have to reimburse all who certify other coverage?
Don Levit