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Disriminatory Contribution Scheme ?


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I've lurked here in the forum for a while now and finally screwed up the courage to post a topic.

I've recently taken some work with a management company covering several thousand employees in a self funded benefit plan.

The participants are all FT employees of the plan sponsor, however, many of the physical locations are owned by the plan sponsors clients. the plan sponsor allows owners to choose from a number of different contribution schemes to support the plan. some owners contribute 50%, some contribute 70%. the end result is that similarly situated employees of the same employer end up paying different amounts to participate in the same plan. My little brain cannot get around the apparently discriminatory appearance of this arrangement.

Before we start the meter with our erisa counsel, does anyone have an opinion regarding this arrangement ? :blink:

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Different contributions for different groups of employees are not unusual. I have 18 unions representing 23 different bargaining units, plus we have management and other unrepresented employees. While we try to keep things fairly similar, I currently have 4 different contribution levels (have had as many as 8) and 2 separate and distinct offerings of health plan choices. If you change representation units, you potentially change health plan contribution level and maybe even health plans. (I am not an ERISA plan.)

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I cannot quite get a grip on this one.

Is the management company also the Plan Sponsor?

Are these "owners" co-sponsors of the plan?

Why would these "owners" (who seem to be the clients) be contributing to the Plan?

What do you mean by "similarly situated employees of the same employer "?

Who is the employer? The management company or the "owner"?

If these are FT employees of the management company, How can they then also be employees of these "owners"?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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As suggested by GBurns, you have two major issues. The first is to determine who is the employer and who are the employees. For various purposes, you may have multiple employers who have their own employees rather than a single employer with employees at various locations. This is a complex matter and you should START with your ERISA counsel, not try to avoid or circumvent your ERISA cousel. This is an issue that should have already been resolved because it is a central issue for management companies. Maybe you don't need to go to ERISA counsel. Maybe someone else in your office is aware of the resolution.

Assuming that you have the simplicity of a single employer with employees at multiple locations and with different benefits or diffferent employer funding of benefits, the issue is whether or not the plan is discrimintory. That is determined under section 105(h) of the Internal Revenue Code. It is possible to have differences among emplyees. Someone should be performing tests to determine compliance. Even if the arrangement is discriminatory, it makes no difference to most employees. Certain highly compensated employees will have taxable income and the employer will have withholding obligations with respect to the taxable income.

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to clarify:

My client is the employer of all plan participants and sole plan sponsor.

My client is A mid sized Hotel management company, that also has ownership interest in some properties.

Different employee contributions are charged to similarly situated employees, based on the different ownership groups and their preferences (clients of my client).

Therefore you can have a General manager at a Holiday Inn in Virginia being charged a different contribution than a General manager at a Holiday inn in Washington, for the exact same plan.

I can't find any document where these differences are detailed. Not in the Plan doc, ee handbook, job classifications.

The scheme predates me and is somewhat tangential to my work. But I noticed it and it does not seem right.

By way of background, I spent the worst two years of my life in the general counsel's office of a large tpa. I fear I may have seen too much during that time :rolleyes: Maybe Im just paranoid.

Thanks for the commentary.

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Please clarify:

"some owners contribute 50%, some contribute 70%"

Why would these owners be contributing to a plan that does not cover their employees and for which they are neither the employer nor a co-sponsor?

If the employee contribution scheme is not addressed in any of the documents, What is the rationale for thinking that it is okay?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Several issues here, including ones you don't raise. My comments:

1. You are right to be concerned about lack of documentation, although I am willing to bet that there is a Summary of Coverage (or similarly titled document) for each benefit/contribution structure. If so, they should either redo their documents, or they should consider a "wrap plan" that incorporates the various coverage summaries. See ERISA attorney ASAP to address this. (Wrap plans have been discussed in several threads.)

2. This sounds to me like a MEWA that is operating without complying with the laws of the states in which it provides benefits to non-employees. BIG RED FLAG. SEE ERISA ATTORNEY NOW.

Your paranoia is justified.

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I have a different question on the same topic but with less complicated facts. Small employer has an insured group health plan and has historically paid 100% of employee coverage but 0% of additional family coverage premiums for all employees. Employer hires a salesman who will be a highly compensated employee and, as part of the negotiating, promises to pay 100% of the salesman's family coverage premiums under the group health plan. (Salesman's old employer paid 100% of family coverage and employer needed to do this to get the salesman on board.) Employer pays the additional family coverage premiums from general assets directly to the insurance company. The plan eligibility and coverage provisions for the salesman and family members are exactly the same as with other participants--the only difference is that the employer pays the salesman's additional family coverage premiums.

Does this arrangement raise any ERISA or other discrimination issues? It seems the employer should be free to pay the salesman a higher salary to offset the family premiums and have the employee payroll deduct the family premiums in the normal course like other employees if it desired. Given that option, it would seem the employer could pay the family premiums directly on behalf of the employee as a payroll practice or other administrative practice that does not raise discrimination or legal issues. I would appreciate any thoughts on this practice.

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jhall,

I do not see a problem if this is the ONLY salesperson that this employer has and will have. Creating a separate "class" for salespersons and giving this "class' different benefits than the other employees is allowed. Any other person in this "class" is similarly situated and should get the same unless a "sub class" can be created.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Gburns and Mbozek,

Thanks for the responses. My other research supports Mbozek's conclusion that there are no nondiscrimination issues when dealing with an insured plan.

Gburns,

Are there particular ERISA regulations or other requirements you have in mind that may require identical employer contributions for all similarly-situated employees or employees within the same class?

thanks.

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In researching this issue further, I do note certain HIPAA nondiscrimination rules which prohibit plans from discriminating with regard to employee premium contributions based on health factors. See ERISA § 702(b). As a result of these rules, health insurers are prohibited from charging an employer or group health plan different rates for similarly-situated individuals based on health factors. (See EBIA HIPAA Manual, p. 429). On its face, this rule would not appear to prohibit an employer from paying premium contributions on behalf of certain employees where the group health plan premium rates established by the health insurer are uniform rates. However, I can see where an argument could be made that by making such premium payments on behalf of some but not others could be considered a HIPAA violation, particularly if there was any argument that the employer varied the premium contributions based on particular employees' health factors. In our case, the employer appears to have made those decisions based on what sorts of benetis would be required to recruit the individual on board and, I think to some degree, how much the employer liked a particular employee versus another.

There is no indication that health status or health factors entered into the decision so I'm assuming such discrimination as to varying employer contribution amounts would be okay under HIPAA. (Again, given the employer's ability to generally make up for such amounts in additional salary or bonuses, I would think it would be tough to truly regulate such practices by employers.)

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What about Proposed Treas Regs 1.125-1 Q&A19 ?

This sales is already known to be highly compensated, so what happens if they employ other sales people who are in this same class but are not highly compensated?

Aside from the HC issue, What do you think would be the case in this scenario:

There were 3 employees in a class, 1 Hispanic, 1 White and 1 Black. Each gets a separately negotiated health subsidy. 1 of these indiviudals decides that the other 2 were treated better and offered better for racial or other Title VII regulated reasons. It turns out that all had made a compromise that was 10% better than initial offer but since each initial offer was different each ended with a different result.

Do you see where this employer has exposed themself to a discrimination lawsuit and a valid EEOC and state labor and civil rights investigations and possible action?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Gburns,

Thanks for your response. I do see where the points you raise could create concerns in certain circumstances. With our particular situation, I think you might can arguably get around the letter of the cafeteria plan rules to the extent that the additional family coverage premiums are being paid directly by the employer outside of the cafeteria plan. The employee is clearly having less deducted from his paycheck and thus less flowing through the cafeteria plan than he otherwise would as a result of the employer's actions but I am not sure that is a clear violation of the 125 discrimination rules, particularly where the "discrimination" would be aimed against other similarly-situated highly compensated employees.

As for the general EEOC and employment law issues, we have discussed those concerns but I am not sure that the proposed health subsidy creates significantly more risk than paying a different salary--particularly if the salary differential just happens to coincide with the family coverage amounts. In our case, employer plans to treat all similarly situated employees the same and doesn't appear to be basing decisions on any improper motivies. I guess I worry more to some degree about similar claims made by employees in other classes who don't get the same benefit.

I do not particularly like the idea of providing different benefits to different classes. Any sort of line drawing or differences in benefits would seem to leave the employer open to various claims; however, I do not believe I can point to an express prohibition on this practice under ERISA.

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If paid directly by the employer outside the Cafeteria Plan, does that not make the premiums taxable income to the employee?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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There is no discrimination if the additional premium is paid by the employer to an insured plan which is not taxed to the employee. Alternatively the employer could pay the cost of family coverage to the employee as taxable compensation which could be contributed to the 125 plan and deducted from taxable income without violating the 125 nondiscrimination rules.

mjb

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