opt out of employer's health plan, get $ in your health FSA?

[mariemonroe]

I have an employer who wants to reward employees who do not need to be covered by the employer's group health plan because they have coverage through a spouse's plan or retiree benefits from a former employer. The Employer would like to make a contribution to the Health FSA for each of these employees. The employees would not have the option of receiving the cash outright.

I am having a hard time figuring out if this is OK.

Reg 1.125-2(b)(2)(ii) seems to permit an employee to opt out of health coverage and receive cash:

The cafeteria plan provides for an automatic enrollment process: Each new employee and each current employee is automatically enrolled in employee-only coverage under the accident and health insurance plan, and the employee's salary is reduced to pay the employee's share of the accident and health insurance premium, unless the employee affirmatively elects cash. Alternatively, if the employee has a spouse or child, the employee can elect family coverage.

Is there any reason an employee can't opt out of health coverage and receive an employer contribution to a Flex FSA instead of cash?

I assume the employer contributions must pass nondiscrimination testing, correct?

I appreciate any assistance.

[GBurns]

What you are describing is usually refered to as "Benefits Credit" or "Flex Credit" and is quite popular in the public sector. Google the search term "Benefits credit FSA cafeteria plan" or similar and you should find many descrptions etc.

[mariemonroe]

I assume you are inferring that this is acceptable. I did many google searches before posting here and could only find plans which allowed employees to opt out of core benefits and receive cash.

Also, can anyone confirm that such employer contributions would be subject to nondiscrimination testing?

[QDROphile]

Section 105(h) of the Internal Revenue Code.

[Guest jackmo]

Marie: Does the employee pay anything if they keep employee only coverage?

[K2retire]

It's not exactly on point, but perhaps helpful. My former employer made contributions to the 125 plan for each employee that were equal to the premium for health insurance coverage. The employees then chose to use the money for health, dental, FSA, disability, etc. Under that plan any unallocated funds were returned 75% to the employer and 25% to the employee.

[Guest jackmo]

To have a cafeteria plan, there has to be a choice between at least one tax free benefit and cash. I don't see how the plan in question can qualify as a 125 plan.

An employee could opt out of health insurance and the emloyer make a contribution to the FSA (if the plan was written that way) but here again, you have a choice between two tax free benefits--still no cash.

And yes, employer contributins would be subject to A/D testing.