Cash in Lieu of Benefit

[Madison71]

Company wants to start a plan where the employee could elect to either have the premium paid by the employer or the employee could receive an amount of money in cash that was slightly less than the premium payment. Is this permissible under a Section 125 Plan?

I am looking at a cash in lieu option in the 125 Plan checklist, but am not sure if this is permissible. Thank you

[QDROphile]

Would you be more comfortable if it were described that the employee was entitled to a certain amount of cash compensation but could elect instead to have the employer pay the health coverage premium that the emplopyee would otherwise have to pay to get coverage?

[Madison71]

Thank you, but not sure I follow. Company is using a check the box 125 document from Ft. William and it is checked "yes" that the employer

will contribute to the plan and "yes" that the employee can select cash in lieu of the benefit. It does not state the amount

of the contribution in the document. If the employer would pay $1,000 in premiums if employee elected health coverage

and pay employee $800 in cash if opt for cash is this permissible?

[masteff]

His point is it's no different than if you were deducting the $800 from one employee's paycheck on a pretax basis while another employee elects to not have it deducted. The 2nd employee is $800 cash ahead of the other employee who instead has $1000 worth of insurance coverage.

A couple of tax codes are at play. One lets the employer pay for medical coverage without it being taxable to the employee. Another lets the employer give the employee a choice between a certain amount of cash and the benefit received without that choice resulting in taxable income.

While certain rules (e.g. discrimination) do apply, the IRS generally doesn't care about the cost sharing arrangement of the benefits in the cafeteria plan. Meaning it's irrelevant if the employer is paying for 20% or 0% or 99% of the cost of the medical coverage. For example, where I work, I only pay 5% of the cost of my medical but I pay 100% of my dental, and I pay it pretax thru a 125 plan. And it would be no different if, instead of deducting it from my pay, my employer put a certain amount of cash into the plan and I made an election to use it to pay my portion of those coverages.

[Madison71]

Thank you both very much. I guess I am having a difficult time wrapping my mind around this and probably did a poor job of asking my question upon seeing the responses. Sorry. Employer agrees to pay 100% of the premiums if employee elects to be covered under the health plan. Employer would rather not pay for employees health insurance so it offers to pay the employee a little less than the cost of the premiums if it were not on the health plan and are calling it a cash in lieu of the benefit (health benefit). So, employee opts out of the health plan and receives cash from the employer. Is this permissible?

[QDROphile]

It is permissible for an employer to cover more of the employee cost of premium than the employee elects to forgo in pay under a cafeteria plan. You may have to come to grips with discrimination rules depending on circumstances.