Is it legal to pay an employee for waiving health insurance?

[Guest lamccormack]

Is it legal to incent employees who have other health plan coverage to waive group coverage by giving them some after tax dollar amount? This would be non-cafeteria plans. They might have a Section 125 POP plan only. Thanks

[QDROphile]

Isn't that a choice between taxable income and nontaxable benefits? That can only be done through a cafeteria plan.

[GBurns]

It would be taxable income.

[Steve72]

First, I agree with GBurns and QDROPhile.

However, I have seen some employers take the position that an employee can elect at the onset of employment, to be a "benefits eligible" or "non-benefits eligible" (with increased compensation) employee. Because there is no annual election to take compensation, there is no constructive receipt, therefore, no cafeteria plan is necessary. it is considered a condition of employment.

Do I think this is without risk? No. It runs a little close to what is intended to be covered by the 125 rules for my liking. And, as GBurns points out, the additional compensation would clearly be taxable (although the employer could gross-up the amount).

If you choose to take this approach, i would advise getting competent benefits counsel to advise you.

[GBurns]

It is probable that these employers that Steve72 refers to are using an interpretation taken from cases like Express Oil Change. Most of which are unpublished and so would require competent legal advice and research.

[QDROphile]

It is not simply a matter of the recipients of the cash paying taxes.

If you don't do it through a cafeteria plan, everyone who has the choice of taxable income will be treated as receiving the amount as taxable income even if they choose the health benefits. The employees who take the health benefits will rightly be very unhappy about paying taxes on money they did not recieve. So make sure the arrangement becomes part of the cafeteria plan.

I do not disagree with Steve72, but expert help is necessary if you are thinking along those lines.

[mbozek]

Why cant the employer define who will be eligible to participate in the plan and pay increased salary to the other employees? 125(d)(2) only requires that plan participants must be offerred a choice between benefits and cash. If the plan is available to X div. employees and the employer pays Y div. employees who are not eligible to participate in the plan 1k more why is that a violation of 125? There is also no prohibition on paying extra comp to HCEs to cover the cost of the employee payments to the plan, e.g., if ee health premium is 3k a year the er could increase HCE salary by 3k.

[GBurns]

Timing and logistics are the usual reasons why this is difficult to do with an existing group of employees unless there is high turnover among the affected classes. Otherwise other issues including substance over form based challenges will arise. Attempting things similar to this years ago is 1 of the reasons for item 8 in Section 3.01 of Rev. Proc 2005-3 which has been there for almost 20 years.

[Steve72]

Why cant the employer define who will be eligible to participate in the plan and pay increased salary to the other employees? 125(d)(2) only requires that plan participants must be offerred a choice between benefits and cash. If the plan is available to X div. employees and the employer pays Y div. employees who are not eligible to participate in the plan 1k more why is that a violation of 125? There is also no prohibition on paying extra comp to HCEs to cover the cost of the employee payments to the plan, e.g., if ee health premium is 3k a year the er could increase HCE salary by 3k.

I don't think that anyone is suggesting that an employer could not do what you suggested, mbozek. The initial question was whether an employer could pay employees to waive coverage, meaning that they were initially eligible.

The theory I described certainly will involve the employer defining the eligible class, however, the fact that it is a detemrination made by the employee to elect to be eligible or ineligible that makes it skirt the line of 125.