Cash Incentive to Opt Out / Waive Group Health Coverage SNAFU

[Eric Taylor]

Would welcome any general thoughts on an unusual (at least in my experience) variation on providing employees cash to opt out or waive group health plan coverage:

Here are basic facts: large employer had a division whose employees were eligible to participate in company's group health plan. The division, however, is comprised of mostly younger workers in competitive field, many of whom desire cash more than healthcare coverage. Employer established program whereby employees were basically told in writing the amount of compensation they would receive for the upcoming year if they waived participation in the group health plan and the amount they would receive if they participated. In this case, all in division were told they would receive roughly $12,000 less per year if they participated. (For example, employee would be told their compensation would be $65,000 if they waived or $53,000 if they participated.) This $12,000 amount was roughly equal to full annual cost of family coverage but the amount was applied to employees electing employee-only coverage as well assuming that a single employee could potentially trip into family coverage later.

Surprisingly, some employees elected to participate in the plan, including some single employees electing employee-only coverage. As a result, these single employees effectively ended up paying more than twice what employee-only coverage generally cost under the plan,

Questions / issues:

1. Although the employer had a cafeteria plan in place to cover other pre-tax deductions, the waiver / opt out arrangement appears to have been handled outside the cafeteria plan as more of a salary negotiation process rather than a cash-out election under the cafeteria plan--i.e., for those electing coverage, the employer just treated their gross pay as $12,000 less than they otherwise would have for the year and never reflected the higher potential salary amount except as part of the initial waiver notice. Appears the cafeteria plan does not expressly contemplate a cash-out right and the waiver was not run through the cafeteria plan in any event. This seems like a clear constructive receipt tax concern whereby those electing coverage might still be thought to have constructive receipt of the full $12,000 in forgone salary. Does that seem correct? Anybody see potential to treat this as a legitimate cash-out under the cafeteria plan even though it was not handled as a cafeteria plan cash-out?

2. Apart from cafeteria plan issues, do you think the size of the reduction for those seeking employee-only coverage was so large it was tantamount to basically excluding them from the plan or, in essence, forcing them to opt out? (Obviously some elected to participate so that cuts against the argument for some but for those at lower income levels the choice might not have been a real choice at all.) Could that be viewed as interfering with their right to participate in plan giving rise to potential ERISA Section 510 claims?

3. My real question--do you think the fact that the employer has essentially applied a salary reduction twice the size of actual cost of employee-only coverage gives rise to ERISA exclusive benefit and prohibited transaction issues? (They did not technically deduct and hold twice the cost of coverage from paychecks but, in essence, one could argue that since the employer benefited by never having to pay the additional amount out as salary.)

Large employer overall so I'm sure there are a host of ACA issues / ramifications with all of this as well but am just trying to get handle on more basic potential tax and ERISA prohibited transaction issues at this stage.

[hr for me]

Ouch...I honestly wouldn't want to be working with or for them as I have to agree it very much goes against PPACA and possibly many of the other issues you bring up along with others. I wish I knew enough to answer your specific questions, but I do know the whole situation is a bad one. I would definitely be seeking legal counsel (both internal and ERISA- knowledgeable)

I see a large part of the issue as it sounds to be an annual election which makes it sound more like a "pay to not play". (Versus a one time election at hire where if they later choose to participate at any level after turning it down at hire, they would have to pay 100% of the costs out of their larger salary.) They also shot themselves in the foot because most plans want the young and healthy single employees to participate to help their claims ratio.

I have to wonder if there isn't a disparate impact issue for age discrimination if only the younger employees chose to take the larger savings ( say 2 to 1) over the older employees with families who were getting more of a 1 to 1 benefit? There have also been some rumblings from the EEOC regarding discrimination because a worker is a parent and that is used against the employee in some fashion.

[leevena]

A waiver credit is still permissable under ACA. But there are at least 2 ACA issues that should be considered. The first issue is that the IRS has not issued any written guidance on the use of waiver credits. Some believe they will allow them to continue, others do not. The second is the impact these waivers may have on the affordability calculations. On this issue there has been verbal IRS guidance stating that the waiver value needs to be added to the affordability calculations, but no written. There are a few non-ACA issues such as participation requirements, overall plan costs, and probably a few more.

As for #2, the size of the waiver, this is confusing and quite frankly I cannot imagine why the employer would do this. Are you sure of the number? I realize costs differ, but a yearly cost of $12,000 is closer to a single cost than a family cost, at least from what I have been seeing lately.

[Eric Taylor]

Thanks to all for your thoughts.

As to the $12,000 amount, that figure dates back a couple of years but we understand reflects what the employer was charging overall for family coverage among other employees not participating in the waiver. I suspect that may not reflect the full total cost of coverage but, in any event, the employee-only participants given the credit waiver opportunity do appear to have paid basically double what those outside the credit waiver group were paying for employee-only coverage. Perhaps that is okay if the waiver amount really is close to total coverage amounts and would just reflect the company setting different rates for different groups but we've never seen a situation where the waiver amount approaches full cost so has us concerned and puzzled on a number of fronts.

Agree about the ACA concerns noted too--just haven't had time to even really try and sort that yet given what appear to be potential tax and prohibited transaction concerns.

[KJohnson]

Look at Notice 2015-87, Q&A 9

[Eric Taylor]

KJohnson,

Thanks very much. That is very helpful on the ACA piece.

Curious if you have a thought on how that may relate to the general 125 cafeteria plan question and constructive receipt concerns. Seems that generally assumes proper cafeteria plan operation where there is an express cash out right. In this case, the employer seems to have thought of this as a two part process. First they would explain the waiver and get people to agree on waiver / comp. Then they would take the lower amount for those participating and think of that as the total annual comp. From there, participants were given option to make deductions under the cafeteria plan for other benefits costs. In short, they appear to have viewed the waiver choice as a negotiation over annual salary rather than a cash out in any way. I'm not sure that works. Do you see others doing that? Is it possible to view that as a cash out under the cafeteria plan even if not structured that way? Thanks.