Flex Credits and Cash-in-Lieu of Health Plan – Impacts Affordability

Flex Credits and Cash-in-Lieu of Health Plan – Impacts Affordability

In recent guidance provided by the IRS and the Department of Labor, questions have been brought to light on 2 related issues: how Section 125 cafeteria plan Flex Credits and how Cash-in-Lieu of Benefits may affect the calculation of “affordable” health coverage when employers (who are subject to the Employer Mandate) report to each full time employee and the IRS.

A “Flex Credit” is an employer contribution in a cafeteria plan that the employee then uses towards their premium when choosing among various benefits (such as health, dental, life and Health and Dependent Care FSA).  Since the employee can use the Flex Credit dollars to contribute towards other benefits than health insurance, the supposition is that the Flex Credit contribution doesn’t count in the calculation of the health plan’s affordability.

A “Cash-in-Lieu” benefit is when an employer provides an employee with any kind of contribution when waiving coverage in the employer’s health plan.  The below is from a DOL response to a separate question in FAQs “Part XXII”.

. . . if the employer’s group health plan requires all employees to pay $2,500 toward the cost of employee-only coverage under the plan, but the employer offers a high-claims-risk employee $10,000 in additional compensation if the employee declines the coverage, . . . , the effective required contribution by that high-claims-risk employee for plan coverage is $12,500 – that is, the $2,500 required employee contribution for employee only coverage under the employer’s plan plus the $10,000 of additional compensation that the employee would forgo by enrolling in the plan. [Thus,] . . . a high-claims-risk employee must effectively contribute more to participate in the group health plan.

While the DOL example references payments to “high risk” employees, the affordability test appears to incorporate any payment in lieu of premium for any employee, high risk or not.


The employee’s contribution for single coverage is $130/ month for lowest cost health plan option (meeting MV).  The employer offers employees who waive health insurance a $50/ month cash-in-lieu benefit.            

For affordability testing, this employer will use $180/ month as the employee contribution for single coverage of lowest cost option.  The cash-in-lieu of enrolling in a health plan could significantly change whether the affordability test either passes or fails.

Essentially what this means is that employers who provide any extra dollars to employees who waive coverage may need to add the amount of the cash opt-out payment to the monthly contribution for single coverage to determine whether that coverage is affordable.  Employers should keep in mind that penalties are triggered by employees who obtain premium subsidies when purchasing coverage on the Exchange.  More guidance is needed from the IRS to directly address these issues but employers may want to act now to review and adjust their policies.