For a 15 person company the employer pays 100% of the employee-only health insurance cost of the group health plan but there are five employees who receive health insurance through a spouse's plan so for these five the employer pays nothing because they have waived coverage. This obviously saves the employer money and somewhat short-changes the five employees who have opted out.

Is it legal and/or appropriate for the employer to pay these five employees the amount of the health insurance premiums as additional salary? Or would that create problems and other issues? Perhaps these employees could deposit the extra salary into a cafeteria plan to use for some other purpose. Any ideas?

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Yes, as long as there is a Section 125 plan in place permitting "cash in lieu" of the benefit. The employer doesn't even need to give the full amount back in cash.

The employer can also allocate x number of dollars into a Health FSA instead of giving cash.

Find yourself a good Section 125/Cafeteria Plan TPA, and they can help you with this easily.

Agreed. It's really up to the company if they want to or not. Since the company hasn't established the practice of paying employees who do not elect medical insurance, I would probably err on the side of caution and not start doing it. A lot of insurance companies require 75% participation for medical plans, especially if the client is paying 100% of the cost for single coverage. Obviously doing the math, the company's already at 66%.

I can see the other side of the argument as well, however - employees complaining that they should get some compensation for not electing medical insurance. The way it should be handled by the employer is that if an employee chooses not to take advantage of company provided benefits then that's his or her own perrogative.