Pay In Lieu of Benefits--Legality/Pitfalls?

Quizmaster

I work for a small company, and we are discussing an optional Pay in Lieu of Benefits Program. Essentially, in exchange for increased pay, an employee may elect to refuse the following benefits: health insurance, vacation time/pay, holiday time/pay, sick time/pay, funeral leave/pay, and other paid time off. Other benefits (e.g., FMLA, WC, etc.)would not be affected. Each employee may choose to participate or not participate. Interested employees may elect to particpate only upon hire or on their yearly anniversary date. Please comment on any legal concerns to consider or other pitfalls associated with such a program. Have any readers tried this?

Scott Ruth

You need to proceed carefully. Anytime you offer a choice between a nontaxable benefit (for example health insurance) and a taxable benefit (for example cash, paid leave, etc.), you have created a cafeteria plan regulated under Section 125 of the Code. You must put the plan in writing, file annual 5500s and follow nondiscrimination rules and specific guidelines concerning election and change of benefits in the middle of the year.

You may also have issues under state law regarding some of the types of leave you mentioned, for example some states require that certain types of leave be provided to employees.