Many employers give their employees the option to receive cash if they opt out of the employer’s health insurance coverage. It is permissible to do so, but the option must comply with IRS rules.
Cash in lieu of benefits falls under the cafeteria plan rules of Section 125 of the IRC. The employer must have a written cafeteria plan in place and the plan must have cash in lieu of the benefit coverage as one of its options. An employer cannot have cash in lieu of policy which is outside a cafeteria plan.
If the employer does not have a written cafeteria plan in place or if the employer’s cafeteria plan does not include the pay in lieu of coverage as one of its options, but the employer offers pay in lieu of coverage outside the plan, the IRS takes the position that all employees have the option to take cash or the benefit and that the employees who chose the benefit coverage and forego the cash will nevertheless be deemed to have received taxable wage income equal to the amount of the cash alternative. See, Prop. Treas. Reg. § 1.125-1, Q & A – 9; Private Letter Ruling 9406002.
In addition, the amount considered to be wages is subject to income tax withholding and FICA and FUTA payroll taxes. Further, the amount considered to be wages should be included in the employee’s “regular rate” for purposes of computation of overtime pay unless the criteria set out in the DOL Opinion Letter FLSA 2003-4 (June 2, 2003) are satisfied. Among the criteria are that the employee must show there is alternative coverage for the coverage being waived and no more than 20% of the employer’s contribution to the cafeteria plan can be paid out in cash. See, Madison v. Resources for Human Development, Inc. 39 F.Supp.2d 542 (E.D. Pa. 1999), vacated and remanded, 233 F.3d 175 (3d Cir. 2000); Prop. Regs at 72 Fed. Reg. 43939 (August 6, 2007).
Posted by Carl H. Hellerstedt, Jr. Mr. Hellerstedt is Counsel with Spilman Thomas & Battle, PLLC. His primary areas of practice are labor and employment and ERISA law.
In February of 2012, the DOL published long-awaited final regs under Section 408(b)(2) of ERISA which took effect July 1, 2012. These require the disclosure of fees that service providers charge to pension and 401(k) plans. In light of this ruling, employers shuold:
- Review their pension and 401(k) plan documents, SPDs and TPA agreements to determine if the company is identified as the plan administrator or named fiduciary.
- Obtain fiduciary liability insurance coverage if the company, committee or individuals are identified as a fiduciary or plan administrator.
- Contact the existing TPA to determine its position on compliance with the new regs. If the existing TPA is willing to provide support for compliance with the new regs, enter into a service agreement with the TPA which spells out what responsibilities of the TPA are and the fees for same. Consider having these fees paid from the company funds rather than the plan assets, at least for the initial compliance requirements.
- Put in place written procedures and policies which spell out how and by whom the fiduciary obligations of the new regs will be fulfilled.
- Don’t permit the company or yourself to be a sitting duck for inventive plaintiffs class action lawyers which are sure to have an interest in the new fee regs.
Posted by Carl H. Hellerstedt, Jr.
Mr. Hellerstedt is Counsel with Spilman Thomas & Battle, PLLC. His primary areas of practice are labor and employment and ERISA law.
In February of 2012, the DOL published long-awaited final regs under Section 408(b)(2) of ERISA to be effective July 1, 2012 which require the disclosure of fees that service providers charge to pension and 401(k) plans. The fee regs do not apply to government plans, simplified employee pensions, simple retirement accounts, IRAs and 403(b) annuity contracts and custodial accounts. The fee regs would also not apply to the fees paid to service providers directly by the employer out of general business funds. The regs are directed at fees paid out of assets of the plan or the individual participant’s account. The kinds of services for which fees must be disclosed include, but are not limited to, direct fiduciary services, direct investment advisor services, record keeping and brokerage services, accounting, auditing, actuarial, legal and third party administration.
Why should the employer be concerned about the new regs? Can’t all these requirements be handled by the existing third party administrator for the plan?
The employer should be concerned because almost always the plan documents name the company as the plan administrator which in turn makes the company a fiduciary with respect to the plan. Virtually all service provider agreements, except those for the trustee custodian of funds and entities acting as investment advisers, disclaim that the service provider is a fiduciary and point to the plan administrator as the fiduciary. Since virtually always it is the employer who has the authority to enter into service contracts, the employer will have the fiduciary responsibility. It is important how the plan and related documents identify the plan administrator and/or the “named fiduciary.” It is highly likely that company is named as the plan administrator. Sometime a committee is named as the plan administrator. Virtually never is the third party administrator (“TPA”) identified as the plan administrator (sometime the TPA is identified as the claims administrator which is not the same as the plan administrator).