Jump to content

Small Employer Paying Varying Percentages of Group Health Premiums for Different Employees


Recommended Posts

This is one of those issues that comes up periodically and I never think I have a full grasp on it--likely because I don't but also in part because I've never found what I thought to be a clear, authoritative, and fulsome discussion of the issues.  Can you help?

Situation this time involves a true Mom and Pop employer with husband and wife owners (both highly compensated) and a handful of other employees--3 or 4 full-time working more than 30 hours a week and a couple part-time working 15-20 hours per week.

The company offers a fully-insured group health plan for full-time employees.  Of those, only the owners and a couple of the full-time employees have elected to participate.  The company has always "covered" 100% of the owners' group health premiums but historically only 60% of the others' premiums with the employees required to contribute the remaining 40%. 

Mom and Pop seem confused about the existence of an actual cafeteria plan but it appears they have been deducting the 40% of employees' premiums from pay on a pre-tax basis so seems they likely have a POP whether they realize or not.  (Our understanding is the company has just paid 100% of the total premiums over to the insurer, including 100% of the premiums on behalf of the owners, plus the combined 60/40 contributions for employees without considering the premiums paid on behalf of the owners to be salary to them or a deferral from their pay in some way.  In other words, it's just been employer-paid fully insured group health insurance coverage.

As I understand the current rules, it does not seem like there is a per se problem with charging varying rates for the fully insured coverage from a group health insurance,  HIPAA, ERISA, or other perspective.  (The 60% contribution satisfies the 50% minimum employer contribution amount required by the insurer / underwriting so insurer is fine with arrangement.)

Cafeteria Plan discrimination testing would appear to be a potential issue here, however.  Even though they presumably only have a POP, my understanding is POPs are still subject to Section 125's "Eligibility Test" as part of the streamlined safe harbor testing.  And based on some less than clear 125 examples and discussion in EBIA, the Eligibility Test arguably includes something of a "benefits" component that could be construed to prohibit an employer paying a greater percentage of benefits for HCs than NHCs.  So that's potentially an issue here.

However, in this situation, the HCs are not actually participating in the Section 125 plan--because the company is paying their full cost and they have no need of the 125 Plan.  In essence, the NHCs are arguably getting more benefit from the Section 125 plan than the HCs because the NHCs are actually getting a benefit.  I'm not wild about that argument for obvious reasons.  However, what if we took this one step further and actually amended the Section 125 Plan to exclude all HCs from participation.  There's no practical impact on the owners (the only HCs now and likely forever) because they are not participating in the Section 125 Plan.  Under that approach, it seems impossible for the Section 125 plan to have a discrimination issue since no HCs could participate?  But it also seems the company should still be able to pay 100% of the owners' premiums for the fully insured health coverage and not treat that as taxable compensation. 

I understand that could all change if and when the new Section 105(h) rules are extended to fully-insured group health coverage but, in the interim, are there nondiscrimination or tax issues with this sort of approach to having the company pay 100% of HCs' premiums and a significantly lower percentage of NHCs' premiums?

Thank you.

Link to comment
Share on other sites

401 Chaos, in the absence of the regs you mention in last paragraph (don't hold your breath for them to drop any time soon), my analysis would agree with yours.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

Link to comment
Share on other sites

Thanks, Luke.  It is comforting to hear that I'm not completely off-track although I'm always uneasy when things are arguably discriminatory on their face.  I feel sure similar things happen a lot though without much clear guidance.  Guess I can understand folks reluctance to endorse or bless these sorts of arrangements but it would be nice to see more discussion of how varying the employer's share (but not the underlying benefits or eligibility) plays out in different situations.

Link to comment
Share on other sites

1 hour ago, 401 Chaos said:

I'm always uneasy when things are arguably discriminatory on their face

401 Chaos, you mean like a separate, fully insured carve-out for a company's managers and executives, while the rest of the workforce are covered by a self-insured MEC plan that may or may not provide minimum value or affordability, depending on the employer's appetite for B penalty risk? That's why the ACA required extension of 105(h)-like rules to fully insured.

Note also that the 105(h) regs themselves, as I recall, do not explicitly address discrimination in the amount the employer contributes for coverage, but only discrimination as to eligibility and benefits.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...