Some of my clients have opted out of employer health Ins. since covered on spouses plan. Employer Has always paid them money in lieu, BUT, mandated that it go to the 401(k) and sit till they retire (not evfen available if over 59 1/2!). Also, employer now states that this money approx $2,000 per year is to be treated like a voluntary sdalary deferral and lowers what they may put in 401(k) or 403(B){yes, they are a 501C3, with an old 401(k) also}. My clients want this money to be paid to them directly and not aaffect their MEA.
I know that the employer doesn't have to pay for health premium not used, but since they do, must it be restricted, etc.?

If the health-care "rebate" must go into the 401(k) Plan, it seems to me it's not a salary deferral contribution because the employee never had the option to take it as cash. Hence it should not count against the 402(g) limit.

My understanding is that if this arrangement is part of a section 125 Cafeteria Plan then this money is pre-tax money and when contributed to a 401(k) on behalf of the employee it is treated as a deferral by the employee. In that case it would impact additional funding by the employee.

If the participant can't receive it as cash, it's not part of a 125 Plan.

If the employee does not have the option to take cash, the election is not made as part of a 125 plan or a 401(k) arrangement.

There is a PLR in which the IRS takes the position that if an employee is given the choice between health benefits or a contribution to a qualifed retirement plan, the employee is currently taxable on the value of the benefit. I believe that the IRS is wrong. Are you willing to litigate?