Excluding certain employees from cafeteria plan

[Guest tws]

Employer wants to establish cafeteria plan that would offer participants a choice between health insurance and a cash benefit. Employer wants to exclude from the plan any employees who are NOT covered under a spouse's health plan. Any problem with this? Thanks for your input.

[papogi]

This makes no sense. It sounds like the policy was set in an attempt to make all covered persons secondary on the plan, but it doesn’t work. Person A has a spouse, and is covered as a dependent under that spouse’s plan. Person B has a spouse, and is not covered as a dependent under that plan. Person A and person B would still be covered as primary under your employer’s plan. Coverage under the spouse’s plan is inconsequential. Many employers are putting policies in place whereby a spouse can only come on the plan if they take any coverage they might be eligible for where they work. This way, they are secondary on the plan in question.

Perhaps they want to exclude from the plan those people who ARE covered under a spouse’s plan. They have coverage elsewhere, so your employer doesn’t want them on their plan. They can get the cash. Employees who have no spouse for coverage can then come on the plan. Marital status is not a “bona fide business classification,” and basing eligibility on this does not seem to be legal.

[Guest tws]

They do not want to exclude anyone from the health plan, just from the cafeteria plan. Any employee who is covered under a spouse's health plan with another employer could participate in the cafeteria plan and elect to take the cash benefit. If the employee is not covered under a spouse's plan, the employer does not want that employee participating in the cafeteria plan and choosing a cash benefit instead of health insurance. In effect they want to force that employee to take the health coverage so that he/she can't decide to go without any health coverage.

[papogi]

When someone participates in the health plan, are payroll deductions (if any) being taken pre-tax? If so, those individuals are still participating in the cafeteria plan. They don’t have to take the cash option to be participating in the cafeteria plan.

If the goal is to make sure that employees don’t go without insurance, you can have a cash option, and require that all waivers of coverage supply proof of other insurance.

[Guest tws]

Employees don't contribute toward health insurance premium, so only purpose for cafeteria plan is to give a cash benefit to those who opt out and have coverage elsewhere. If I understand your reply, rather than exclude employees who don't have coverage elsewhere, everyone would be eligible to participate in the plan, but only those who had coverage elsewhere could elect the cash benefit. Thanks for you input.

[g8r]

This isn't common, but variations on this do occur. See rev. rul. 2000-27 which I've referred to below.

Another way to state it (and this may be an over-generalization based on what this specific employer is doing is) -- Everyone gets health coverage from the employer. But, if you certify (or provide proof) that you have other coverage, you can opt out of our coverage and get cash.

In this case, you are only allowing an opt-out of the health plan if you have coverage through a spouse's plan (as distinguished from having any other coverage such as an inidividual policy or COBRA from a prior employer).

It's similar (but not exactly the same) as Rev. Rul. 2002-27. In that ruling, as long as the employer only required a certification (rather than proof) of other coverage, then it was held that it's not even a cafeteria plan. I never could figure out the distinction between proof vs. certification (maybe there's some older ruling out there dealing with situations where the employer required proof). And, here you are limiting it to spousal coverage.

So, your facts may be different than the Rev. Rul. If you determine that you are comfortable relying on that ruling, then you don't even need a cafeteria plan. It's just "an arrangement" that the employer offers to employees.