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How do you determine affordability in a cash-in-lieu situation?

Updated: Jun 19, 2023

An option called a “cash in lieu” plan (sometimes called an opt-out or cash-out) can be a possible solution for employers. With a cash-out, the employer can only give them a taxable cash incentive to take other coverage. This can only be done through a cafeteria plan where the employee either enrolls in tax-free benefits or receives taxable compensation. Thus, if the employer wants to offer taxable cash to those who waive coverage, they’ll need to amend the cafeteria plan document to allow for a cash-out, and should also consider offering the cash out on a monthly basis instead of a lump sum annual basis in the event someone leaves employment midyear.

If an the employer is an applicable large employer (ALE), they will need to consider the cash-out’s impact on the affordability calculation for the health plan:

If any eligible employee is allowed to receive the cash amount without showing proof of other health plan coverage, this is called an ‘unconditional opt-out.’ An unconditional opt-out means that any amount that the employee elects as taxable cash must be added to the employee’s cost of coverage when calculating affordability and reporting the cost of coverage on Line 15 of Form 1095-C.

For example, an ALE offers a group health plan. The employee’s cost for employee-only coverage is $200 per month. The employee waives coverage and the group doesn’t require proof of other permissible coverage. The employer gives the employee $150 in taxable cash each month (unconditional opt-out). So, because the employer doesn’t require proof of other coverage, the cost of coverage reported on Line 15 would be $350 per month. Thus, the employer’s affordability calculation would have to be based on single coverage of $350 per month.

If an ALE limits the cash-out to only those with proof of other MEC coverage, this is called a ‘conditional opt-out.’ With a conditional opt-out, any employee can still decline coverage for any reason, but only those showing documentation of other coverage would receive the cash payment. So, by conditioning the opt-out, the cash amount would not need to be included in the employee’s cost of coverage on Line 15. For this purpose though, ‘other coverage’ must include Medicare, TRICARE, or other group coverage – it cannot include individual coverage or healthcare sharing ministries.

To summarize, employers may implement a “cash in lieu” plan (opt-out or cash-out) through the Section 125/cafeteria plan, which gives employees a choice between taxable compensation and non-taxable benefits. However, if the employer wishes to preserve affordability under the ACA because they are an ALE subject to the employer mandate, then they will want to offer a cash-out option with a conditional opt-out (cash amount only to those with other MEC including Medicare, TRICARE and other group coverage; not individual coverage and not a healthcare sharing ministry). Otherwise, if an employer offers coverage to anyone who waives for any reason (unconditional opt-out), or outside the cafeteria plan, they would have to include the cash-out amount in the affordability calculation. Once the employer decides to offer a cash-out option, it must be included in the cafeteria plan document and followed accordingly.

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