Cash for Benefits, a Cautionary Note

Have you, as an employer, ever thought about giving your employees cash in lieu of benefits?  On one hand it seems kind of fair, why not give cash to en employee who is covered by their spouse’s insurance and relieve yourself from that burden?

Protect yourself with necessary docyments

Recently a client asked me if they could give cash to an employee who didn’t need the health insurance that the employer offered.  I knew there was a rule about that and I was sure there is some sort of a document for that, but I needed to do a little research since I really hate to guess on important issues.

An employer can definitely give cash to an employee who waives benefits.  There are of course a few things to be aware of.

  • Cash in lieu of benefits falls under Section 125 of the Internal Revenue Code
  • You need to have a document in place to offer this legally to your employees
  • You must offer this to all employees so as to not discriminate in any way

This next part is a suggestion, a strong suggestion.  When an employer offers a benefit package, even if we are just talking medical coverage, the idea is to help employees to stay insured.  My suggestion is to have an internal document in place that the employee signs.  The form should include the following:

Proof that the employee is waiving off the employer sponsored plan because they have other insurance coverage.  I would suggest that an employee provides proof such as a copy of their ID card.  I would also suggest that at an employer’s annual open enrollment period, that employee signs the form and provide proof.  Every year!

My other suggestion is that full reimbursement is not the cash amount being reimbursed.  You don’t want to provide an incentive for employees to say they have coverage and then drop the coverage once they’ve given you proof and have the cash in hand.  If the monthly premium is on average $500, I would suggest a smaller amount, such as $200.

One last important thing, cash in lieu of benefits is subject to taxation, but like regular wages.

What about you, would you like to receive cash if you had benefits elsewhere?

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