Benefits in Exchange for Waiving Medical Coverage

Compliance, Employee Benefits

Cash In Lieu

Employers may offer employees additional taxable compensation in exchange for waiving coverage under the group health plan. These arrangements are also known as opt-out arrangements.

Employers subject to the Affordable Care Act’s (ACA) Employer Shared Responsibility (ESR) requirements need to consider the impact an opt out arrangement has on the affordability of the coverage they offer. For ESR purposes, there are two types of opt out arrangements as described below:

Taxable cash payments offered for waiver of health insurance regardless of whether employees have coverage elsewhere. If an employer provides an unconditional opt out arrangement, the amount of the opt out payment is added to the lowest cost single coverage premium when determining the affordability for ESR purposes. For example, if the unconditional opt out payment is $200 per month and the lowest cost, single coverage monthly employee premium share is $100 per month, the premium would be $300 per month for ESR affordability purposes.

Taxable cash payments offered for waiver of health insurance only to employees who attest they are enrolled in minimum essential coverage under another plan that is not individual market or Marketplace coverage. The amount of a conditional opt out payment is not factored into ESR affordability calculations.

Employers should also consider the Medicare Secondary Payer (MSP) rules when determining whether to offer the opt out arrangement to Medicare eligible employees. The MSP rules prohibit offering financial incentives to someone who is Medicare eligible to enroll in Medicare over the group health plan. However, no formal guidance has been issued regarding the interaction between MSP rules and employer opt out arrangements. Employers should consult with legal counsel regarding offering an opt out payment to Medicare eligible employees.

Health Reimbursement Arrangement (HRA) Contribution

Employers may offer an HRA to employees who waive health insurance coverage, but there are additional compliance obstacles that often make doing so impractical.

HRAs generally must be “integrated” with a major medical plan to comply with ACA requirements. Most often, the HRA is integrated with the major medical plan offered by the employer.

A stand-alone HRA offered as a result of an employee’s waiver of the employer’s major medical plan would obviously not be integrated with that major medical plan. The offered HRA, however, could be integrated with another employer’s major medical plan, such as a spouse’s plan. Employers who offer this type of HRA will need proof of other coverage to satisfy the integration requirement.

Some types of HRAs are exempt from the integration requirement, such as limited purpose HRAs. However, reimbursable expenses are limited to dental and vision expenses and therefore this type of HRA may prove less useful to employees.

Additionally, HRAs, as self-funded health plans, must pass nondiscrimination requirements in Internal Revenue Code 105(h) which prevent self-funded health plans from discriminating in favor of highly compensated individuals.

Health Savings Account (HSA) Contribution

Employers may offer HSA contributions to those who waive health insurance coverage, but not every employee who waives the health insurance will be able to receive HSA contributions, making administration complex and potentially less beneficial.

Employees must satisfy HSA eligibility requirements to make HSA contributions and receive HSA employer contributions. One of the requirements is for the employee to be covered by a qualified high deductible health plan (HDHP). Employees who waive an employer’s health coverage would need to be covered by another qualified HDHP, and meet all other eligibility requirements, to receive the employer HSA contribution. It is possible that only a portion of those who waive coverage would be eligible to receive HSA contributions in exchange.

Additionally, HSA contributions should be made through the Section 125 plan to avoid the more restrictive HSA contribution comparability rules. This can impact nondiscrimination testing results for the Section 125 plan.

Flexible Spending Account (FSA) Contribution

Employers may offer FSA contributions to employees in exchange for waivers of health insurance, but it is important employers maintain the FSA as an “excepted benefit” to avoid many of the requirements that would otherwise apply to the FSA as a group health plan.

One of the requirements for an FSA to remain an excepted benefit is for the FSA to satisfy the maximum benefit condition. This condition is satisfied if the employer contribution to the FSA is limited to the greater of equal to or less than the employee’s FSA salary deduction or $500. For example, if the employee elects to contribute $1,000 to the FSA, the employer can contribute a maximum of $1,000.

This requirement limits the amount of employer contribution to the FSA and may not be viewed as beneficial in exchange for the waiver of health insurance. In addition, employer contributions to an FSA may also impact required nondiscrimination testing for the FSA.

401(k) Contribution

Employers may offer employees an additional contribution to their 401(k) in exchange for waivers of health insurance coverage. Employers who offer this option must also offer the choice of taking the additional contribution as taxable income.

Employers should keep in mind 401(k) plan limits and nondiscrimination requirements if they wish to offer this option.

403(b) Contribution

Employers cannot offer employees additional contributions to a 403(b) in exchange for waiving coverage.

Employers can offer employees cash in exchange for waiving health coverage and employees can then allocate the additional cash to their 403(b), but the choice cannot be directly between health coverage or a 403(b) contribution.

Key Takeaways

Offering alternative benefits to employees who waive your medical plan may be a good way to provide additional employment benefits. However, it is important to understand the compliance considerations applicable to these alternative benefits.

The information provided is a summary of laws and regulations relating to employee benefit plan compliance. This information should not be construed as legal advice. In all cases, employers should consult with their own legal counsel.