Opt-Out Payments to Encourange Waivers of Participation

[Guest Edward McElroy]

A client will be shifting to a PPO. The client wants to encourage certain employees to opt out of medical coverage. Accordingly, if employees elect to opt out of coverage, the client will give them a certain amount of cash (all or a portion of the employer-portion for PPO coverage). The client has a cafeteria plan. Must these payments be treated as taxable benefits under a cafeteria plan (under the argument that all employees basically have flex dollars)? Alternatively, can these amounts be paid outside the cafeteria plan?

On another note, may the client pay different amounts to different employees under this opt-out provision?

It would appear that these amounts would be paid under the cafeteria plan. If so, the client would need to worry about non-discrimination requirements if different amounts were paid.

Thanks in advance. Ed