Vesting for Cash Opt Out

[Benefits 101]

Can an employer (fully insured) offer a greater cash opt out benefit based on years of service?

For example:

1st year = employee can take health insurance, or receive $50 per month

2nd year = employee can take health insurance, or receive $100 per month

3rd year = employee can take health insurance or receive $200 per month.

[jsb]

?? Why would you do this? Isn't the purpose of an opt out incentive is to get people to make prudent financial decisions, both for you and them? If you want to reward longevity, do it elsewhere. Doesn't my longevity have added value to the org, even though I need insurance? Just a thought...

[Benefits 101]

There are absolutely excellent reasons to do this... which I won't get into here. Thanks for the response, but I was asking for possible compliance / legal issues with such a design. I do not see one, but I was thinking someone here could help confirm or deny that thought.

Anyone see any potential legal issues here?

[Chaz]

This would have to be run through a cafeteria plan. I have not looked at it before but have you considered whether this design would run afoul of the cafeteria plan nondiscrimination tests?

[Benefits 101]

No, this would pass non-discrimination testing. But good point if this was done for a really small employer. With large employers, I don't think its really an issue.

Although that is somewhat of a grey area issue... does non-discrimination testing apply to taxable benefits... like an opt out? I'd say no... because the general idea of testing is to make sure high wage earners pay taxes. Here, non taxable benefits (i.e. premium payments) are being converted into taxable wages... sooooo the IRS is getting paid. Don't see why they'd be unhappy with that.