Cash Instead of Healthcare Benefits?
Offering employees compensation in lieu of healthcare benefits is an option business and maybe the only option for businesses with fewer than 50 employees. This is called an opt-out agreement. In an opt-out agreement, employees choose to opt-out of employer-sponsored healthcare packages and receive pay as a substitute. This may be an option for your organization but be sure to look at the whole picture and what challenges could arise before making this decision.
For small businesses, this would fall under the Qualified Small Employer Health Reimbursement Arrangement (QSE-HRA). Under the QSE-HRA, an employer with fewer than fifty employees can provide reimbursement for their employees’ purchase of health insurance through the Affordable Care Act (ACA) or elsewhere. In this situation, companies do not have to offer any healthcare options and can offer only the reimbursement program.
Employers with fifty or more employees may offer opt-out agreements but must offer a group healthcare plan to their employees. If an opt-out agreement is an option, it must be offered under a Section 125 Cafeteria plan in order to avoid tax consequences for the employee. What this means is that because an employee has the option for cash, it may be necessary to include in their taxes if employers do not follow guidelines under the Section 125 Cafeteria Plan.
The Affordable Care Act also sets some standards for businesses. Under the ACA, the premium offered to your employees will be considered in determining their premium for insurance through the healthcare marketplace. Because of this, there are guidelines for determining the amount that you offer your employees. While there is an “opportunity cost” associated with choosing cash over a group healthcare plan, meaning the amount of cash can be less than might be paid by the employer, the amount given in cash should still be enough that the employee can choose to pay for healthcare through the Healthcare Marketplace or in another way.
There are a few different ways to offer opt-out agreements. An unconditional opt-out, is simply an opt-out with no conditions and the opt-out incentive must be included when determining the cost of their healthcare through the Healthcare Marketplace. The conditional opt-out allows the employer to set limits for eligibility, decreasing the risk of being in violation of the ACA and/or other state and federal tax law. With conditional opt-out employers set specific criteria for employees to be eligible, such as being covered under another group plan (by spouse, parents, etc.). Lastly, and eligible opt-out is when an employee decides to opt-out and simply signs a statement saying they are choosing not to receive the healthcare offered by their employer and will seek the minimum essential coverage elsewhere.
No matter how you offer your opt-out arrangement it is important that you ensure there is no room for discrimination. Offer the opt-out to all eligible employees. In addition, look at the local, state, and federal laws surrounding healthcare and benefits requirements. Educate yourself on what is needed to ensure compliance and reasonable taxation. Experts also suggest that you consider how you will pay employees opt-out incentives. Employees paid in one lump sum may have challenges getting healthcare if they have a special enrollment situation and need to join a plan mid-year. Your organization may also face challenges if an employee quits. In this situation, the employee keeps the lump sum and your organization has spent more than if they had provided a monthly payment of the incentive. No matter your industry, educate yourself on the local, state, and federal laws surrounding this issue and create supporting policy, before making your final decision.