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Coverage for some beneficiaries, not others


Guest LLandau
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Guest LLandau

Client wishes to cover premiums for beneficiaries of salaried employees.

Client does not wish to cover premiums for beneficiaries of hourly employees. Client does not even want to offer coverage to the beneficiaries of hourly employees :angry: .

Goes without saying that the plan is stinky, but is the plan legal?

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generally (for welfare plans):

1. no erisa mandate for coverage

2. no code mandate for coverage -- but could have bad tax, e.g. discriminatory self funded medical plan under 105(h); and

3. state laws mandating coverage of employees should be preempted by erisa.

Thus, salary only coverage generally legit.

Note though employment discrimination laws (age, sex, race, etc.) do apply to plan coverage decisions.

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I agree with RTK. IRC 105 prohibits discrimination in favor of highly compensated individuals, not salaried employees. If HCIs are salaried and hourly are not HCIs, the plan will discriminate and the entire premium will be taxed to the HCIs. However, only the excess will be taxed to the HCIs if some of the salaried are non-HCIs, the usual scenario.

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Vebaguru:

Assuming this plan is self-funded, and the 105(h) rules apply, I believe covering dependents in this manner is considered a discriminatory BENEFIT, and the taxable income would be all benefits paid to dependents of HCIs, not the cost of the premium.

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