FAQ: Can I offer my employees a cash payment if they waive coverage under the medical plan?

October 29, 2019

Yes, an employer may provide a cashable waiver to employees who decline medical coverage. However, they have to be very careful with its design, particularly applicable large employers that are subject to the employer mandate.

Section 125 is the exclusive means by which an employer can provide employees with a choice between taxable cash and nontaxable benefits. Thus, any cashable waiver must be included in the written Section 125 Plan Document as a qualified benefit.

An employee can waive coverage under Section 125 for any reason — even if they have no other coverage. However, if the employer is subject to the employer mandate, then they should likely only allow employees to opt-out and take the cash if they certify that they have other MEC. This is called a conditional waiver. If any waived employee is provided with the cash-out regardless of whether they have other MEC, this is called an unconditional waiver and it can negatively impact a large employer’s affordability calculation.

Let’s look at an example. ABC company offers employees the opportunity to enroll in self-only coverage for $150 per month. If the employee waives coverage, they would receive $75 as a cash-out amount. The $75 is taxable income. Under a conditional waiver, the employee must certify that they have other MEC to receive the $75 per month. The cost of coverage for affordability and Section 6056 reporting purpose is $150 per month. Under an unconditional waiver, any employee waiving coverage receives $75 per month. The cost of coverage for affordability and reporting purposes in this case would be $225 ($150 plus $75), and the $225 is the amount the employer would have to use to determine affordability.

MEC includes Medicare, TRICARE, Medicaid, and other group coverage. It does not include individual coverage. It can sometimes be difficult to distinguish individual coverage from group coverage by simply looking at a health plan identification card. This is why it is best to simply have the employee self-certify whether they have other MEC.

Lastly, please note that this issue only applies to employers who implement a cashable waiver design on or after December 16, 2015. If the employer’s design was adopted before that date, they are not required to treat the opt-out payment as increasing the employee’s required contribution.