Compensating Employees Who Opt Out of Health Insurance
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Should employees who opt out of your company's insurance plan get a little something extra in their check? Maybe not — the practice could create complicated tax issues for you. April 24, 2006
Question
I have two employees that are opting out of health insurance because they are covered under their wives' plans. Should I give them a raise to account for what I would be paying in insurance cost? Just wanted to see what other folks are doing.
Forum Responses
(Business and Management Forum)
From contributor H:
I suspect they make a contribution to their benefits now. If they opt out, then they get a raise via no longer getting that contribution deducted from their pay. If you provide them 100% paid coverage, they would not be opting out, I believe. If you feel a little guilty about lowering your overhead by a decision they make, don't.
From contributor B:
We just started health insurance for our employees a month ago and there were two who opted out. I did compensate them by giving them a raise. The reason is that I figured the amount we would pay for insurance as part or all of the raise for the other individuals. I felt that this was fair, because the two using their own plans had to pay part or all of the insurance.
From contributor T:
There are some semantics involved here that can cost you money if you are not careful. This is how my tax accountant explained it to me. You have to be careful to distinguish between wages and benefits. You can offer tax free medical insurance to your employees but to keep the transaction tax free, it must be in addition to wages, not in lieu of wages. As soon as the benefit becomes part of the remuneration structure, it becomes treated as income and, as such, is subject to witholding tax on the employee's part, and FICA contribution for employee and employer. If just one of your employees is paid extra wages in lieu of medical insurance, the medical insurance becomes income to everybody. You can offer the medical insurance as a benefit, and deduct the cost as a business expense. Just don't call it as "in lieu of wages."
From contributor R:
Some larger companies do give their employees money for opting out. I wouldn't do it in the form of a raise for several reasons. 1) You can't easily take it back should they ask for health insurance down the road, say... when the spouse gets laid off, 2) every time in the future when you give an increase, the increase acts like compounded interest, and 3) when they work overtime, you are paying even more than you had intended, perhaps paying them more than those who get the insurance, and 4) compensation should reflect contribution and performance. In other words, pay the person what they are worth and evaluate their performance against that pay. Don't build an artificial base by adding in some amount for insurance opt-out compensation.
As an alternative, perhaps you can show a line item on their paycheck called "Health Insurance Opt-out" that pays them the opt-out amount. Do get the advice of an accountant to make sure you aren't causing some unintended problem as mentioned above.
From contributor S:
Take contributor T's advice very seriously and check with your accountant before offering wages in lieu of health insurance. They are not the same and my accountant told me that it was against the law to do that for one person without offering it to everyone.
