publications full of ideas
Cash-Out Options
Things to Consider Before Jumping In

7.5.2017

With the rise in health insurance costs and changing work demographics, employers nationwide are considering innovative benefit designs that are intended to not only contain costs but also provide employees greater flexibility toward benefit selection.

Enter the cash-out option in a cafeteria plan. This can include:

  • Unused employer-provided flex credits or additional credits for declining listed benefits;
  • Incentive payments for declining health insurance coverage – i.e. a strictly “cash in lieu of benefits” arrangement; or
  • A plan that offers deferral of flex credits to a 401(k) plan (such plans must offer a cash-out option).

While a cash-out benefit option is valuable in that it helps maximize employee choice (which can be especially useful when employing a wide range of employees with different interests), as with any benefit structure, it is important to consult with knowledgeable employee benefits counsel to assess the pros and cons before jumping in.

Many laws can affect a cash-out arrangement, including (but not limited to):

  • Incentives to opt out of health insurance can trigger concerns under the Medicare Secondary Payer and TRICARE incentive prohibition rules;
  • Directing too many flex credits to an FSA can lead to the FSA no longer being an “excepted benefit”;
  • Depending on whether the cash-out option is conditioned on proof of other group health insurance coverage, the amount of the cash-out can affect affordability calculations under the Employer Mandate;
  • Offering opt-out incentives to high-claims employees could be interpreted as discriminatory under HIPAA, ADEA, etc.; and
  • The compensation under a cash-out option may count as part of an employee’s “regular rate” of pay for purposes of calculating overtime under the FLSA.

The law is developing around cash-out features and should be continually monitored. For example, the United States Supreme Court recently declined to hear a 9th Circuit case that determined cash-out payments do in fact contribute to compensation calculations for overtime. This precedent is only binding in the 9th Circuit, but it affects employers nationwide who want to be circumspect about benefit offerings.¹

None of this means that employers cannot or should not utilize cash-out options – you simply need to be mindful of the issues. There are ways to address these issues. For example, you could adjust wages or benefit offerings to offset overtime costs or you could direct the cash-out options to a 401(k) deferral to take advantage of an FLSA exception. Solutions are only limited by your imagination as tempered by legal constraints and risk tolerance in the absence of clear guidance.

_____________________________

¹Specifically, the 9th Circuit includes Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington.

Brenna Davenport, an attorney no longer with Poyner Spruill, was the original author of this article.

Physical Address: 301 Fayetteville Street, Suite 1900, Raleigh, NC 27601

related information

what's new at the firm

Two Poyner Spruill Attorneys Help Work for Tomorrow through Mentor Program at UNC Law

2/20/2018

RALEIGH, NC – Founded in 2016, the McIntyre-Whichard Legal Fellows Program is now in its second year of existence at the University of North Carolina School of Law. The program was founded by two UNC Law School alums and is co-sponsored by the North Carolina Study Center and the UNC Christian Legal Society. The program is named after Poyner Spruill partner and former U.S. Congressman Mike McIntyre and former N.C. Supreme Court Justice Willis Whichard, who are both alums of the university and serve as program mentors.

Poyner Spruill Diversity Committee to host panel discussion with key leaders in the legal field to celebrate Black History Month

2/12/2018

The Poyner Spruill Diversity Committee is celebrating Black History Month by hosting an intimate panel discussion with key leaders who have been successful in the legal field.

Twenty-three Poyner Spruill Attorneys Honored by Super Lawyers in 2018

2/5/2018

RALEIGH, NC – Poyner Spruill is pleased to announce that 16 of its attorneys have been recognized as 2018 North Carolina Super Lawyers and 7 were named as 2018 North Carolina Rising Stars by North Carolina Super Lawyers Magazine.

Poyner Spruill’s Client Service & Strategy Manager to Present at the 2018 Festival of Legal Learning

1/23/2018

RALEIGH, NC – Poyner Spruill’s Manager of Client Service & Strategy, Brandi Hobbs, has been invited to present at the University of North Carolina School of Law’s 2018 Festival of Legal Learning. The festival will take place February 9-10 at The William & Ida Friday Continuing Education Center in Chapel Hill.

Poyner Spruill files amicus brief with U.S. Supreme Court on behalf of European business organizations

1/12/2018

RALEIGH, NC — Led by partner Saad Gul, the law firm of Poyner Spruill LLP filed an amicus curiae brief on behalf of five European business organizations, asking the U.S. Supreme Court to uphold a lower court’s ruling preventing officials from accessing specific private emails housed on a server in Ireland.