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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:

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):

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.

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