Dear XXXXXfrom LNSU,
Thank you for your feedback. It caused me to re-read your question. Do to the back log in here, I was moving very quickly and mis-enterpreted part of your question. Here is a detailed explanation of my answers and a re-statement of one part.
REGARDING THE GRACE PERIOD: The grace period referes to the carry over of contributions from the previous years; and the enrollment of new hires or newly eligible who have up to 60 days to enroll. Simply forgetting to enroll before the new plan year knocks him out of the plan. You can pay this person in lieu of benefit however.
REFERENCE: IRC section 125 (4)
REGARDING THE PAYMENT IN LIEU OF BENEFITS: This is my interpretation and application of a body of laws, not just one law. There is nothing in IRC or USC that specifically states, that you cannot check on how that particular payment is used, except that there may be some case law to substantiate. You wil lnot find the magjc sentence that says: "Employers may not ensure the payments received in lieu of benefits must be used to purchase alternative health plans". You won't find it. You are asking us for an opinion about your circumstances, based on my knowledge, experience and training regarding employment and tax related law.
REFERENCE 1: IRS Publication 525, Chapter 5: and Publication 15-B
Quoting from the IRS topical discussions on this subject:
"enerally, qualified benefits under a cafeteria plan are not subject to FICA, FUTA, Medicare tax, or income tax withholding. However, group-term life insurance that exceeds $50,000 of coverage is subject to social security and Medicare taxes, but not FUTA tax or income tax withholding, even when provided as a qualified benefit in a cafeteria plan. Adoption assistance benefits provided in a cafeteria plan are subject to social security, Medicare, and FUTA taxes, but not income tax withholding. If an employee elects to receive cash instead of any qualified benefit, it is treated as wages subject to all employment taxes...."
Becasue the IRS classifies this as wages or other compensation, it follows that the employer cannot direct the person how to use the money. It would be a violation of "Right to Privacy Rules" and Title VII. Elements of the FLSA and Equal Pay act also apply to my position on this issue.
The issue is related to timing of the benefit. Some companies provide this benefit as a matter of policy ,without proving coverage.
In your question, you asked if an employer should. I beliieve it is uneforceable and companies should not. There are proponents for both sides. The proponenets claim the issue is corporate fiduciary responsibility to ensure employees are covered.
You can make it a requirement before the fact. That is, in order to qualify or be eligibile for the company's alternative plan for payment in lieu of benefits program, you can require the employee to show proof of coverage. However, there is no gaurantee the employee is going to maintain the coverage. How would you police that? There is also no requirement to ensure the employee is covered by an alternative plan. Once the emlpoyee is receiving the payment in lieu of benefits, it is wages. Once they are no longer participating in the corporate plan, it is a private matter.To require ongoing proof of coverage beyond the open enrollment program would be descrimination (Document Descrimination).