When you offer a cash incentive to opt-out of health insurance...if you roll the cash amount into the employees 401k or flexible spending account, would you still need to have a cafeteria plan in place or is a flexible spending account sufficient to handle that form of cash incentive?" The other side of the coin is "what if you give cash back directly to the employee" does a cafeteria plan need to be in place?

If you offer cash to employees for opting out of health insurance you need to have a cafeteria plan in place. Otherwise, you have constructive receipt issues for those employees who select health insurance and do not receive the cash. You might want to look at this thread.

http://benefitslink.com/boards/index.php?showtopic=1274

Can you define "constructive receipt issues" for me?

Basically, if employeee are offered the choice between cash and a non-taxable benefit, all employees are "deemed" to have selected the cash or are in "constructive receipt" of the cash and will be taxed. In other words, the opportunity to receive cash is, in the IRS's eyes, the same as actually receiving the cash. Therefore if you offer $100 to everyone who "opts out" of health insurance, all employees (obviously those who receive the $100 and not so obviously those who take the health insurance) will be deemed to have received the $100 for taxation purposes.

A cafeteria plan, however, is a permissible method of allowing a choice between cash and a non-taxable benefit so that individuals who receive the non-taxable benefit are not deemed to be in "constructive receipt" of the cash.

What if the Cash bonus is rolled into their 401k or flexible spending account? Would a cafeteria plan still be necessary?