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Can an employer charge employees different contribution amounts for he


Guest Maureen Kelley
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Guest Maureen Kelley

Would it be discriminatory for an employer to charge highly compensated employees 10% of health insurance costs and nonhighly compensated employees 20%, where all employees can exercise the option to pay for their portion of helath insurance premium on a pre-tax basis through a cafeteria plan?

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Is the proposal to charge HCEs 10% of the premium and NHCEs 20% of the premium? Or is it 10% coinsurance for HCEs and 20% coinsurance for NHCEs? Either way, it looks like you have a discrimination problem.

Is the group health plan fully insured (i.e., not self-insured)? If your group health plan is fully insured, you could exclude the HCEs from the 125 plan. That means no premium contribution or an after-tax premium contribution from the HCEs. Then, the 125 nondiscrimination rules no longer apply.

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Guest fibmcgee
Originally posted by Linda

Is the proposal to charge HCEs 10% of the premium and NHCEs 20% of the premium?  Or is it 10% coinsurance for HCEs and 20% coinsurance for NHCEs?  Either way, it looks like you have a discrimination problem.  

Is the group health plan fully insured (i.e., not self-insured)?  If your group health plan is fully insured, you could exclude the HCEs from the 125 plan.  That means no premium contribution or an after-tax premium contribution from the HCEs.  Then, the 125 nondiscrimination rules no longer apply.  

If we are talking about contribution rates, the answer on discrimination is maybe or maybe not!!! Section 125 has its own testing rules. Matter of fact Section 125 has three tests:

1. Highly compensated as to eligibility

2. Highly compensated as to contributions and benefits

3. Key employees as to concentration of benefits (the 25% test)

The area in question would be Test 2. A cafeteria plan will not be deemed to discriminate as to contributions and benefits where total nontaxable benefits and total benefits do not discriminate in favor of the highly compensated. The requirement will be met if the opportunity to select non-taxable benefits (and the selection itself)is not disaproportionate to compensation. So, you must ask whether the nontaxable benefit of the highly compensated is or is not disproportionate to compensation.

Of course your type of arrangement will cause some employee morale problem. We usually see the opposite arrangement with contributions based on pay. The higher the pay-- the more the contribution.

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  • 1 year later...

I think the point, for the cafeteria plan, is that HCEs will only be running 10% of the premium through the cafe plan and nonHCEs will be running 20% of the premium through the cafe plan. How can this run afoul of the cafeteria plan discrim rules, where nonHCEs are receiving a disproportionate benefit under the cafeteria plan? Isn't the employer's choice to pay more of the premium for HCEs simply a payroll issue, as long as the employer's contribution is not made through the cafeteria plan. This means, I think, that an employee who waives coverage will not be able to have the premium amount paid to them in cash, but it would allow the employees to have the pre-tax benefit for their portion of the premiums.

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  • 2 weeks later...
Guest llerner

It is quite common for employers to contribute more by classification, i.e. management vs. non-management, salary vs hourly - often referred to as "management carve out" (executives/directors have a carve out plan that has richer benefits than the other employees). As long as the employer does not single out a particular employee and is consistent with how this is applied, there is no problem in this regard. However, the discrimination testing will determine if these HCEs can participate in the cafeteria plan based on group insurance premiums, dependent care contribution and medical reimbursement accounts elections. In this case, iat first glance it appears from the information that the HCEs will have less pre-tax income run through the cafeteria plan. However, this may not be the case if they pay for dependent coverage and cover more dependents. have more dependents cover, a carve out plan that is richer and more expensive than the rank and file (PPO vs HMO). If they have reimbursement accounts, that would add to the mix and is included in the discrimination testing as well.

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Kirk is right regarding a minimum employer contribution. One of the first terms I learned as an employee benefits consultant for a midwest insurance company was "adverse selection," i.e., when there was no employer contrib toward the group insurance premium the only enrollees will be people who have to have insurance. Usually happens with very small plans where the ER can't afford to help with insurance prems, but still wants to offer the benefit. I believe our underwriting standard was minimum ER contribution 50% for single coverage. Maverick

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Guest llerner

In California the requirement is typically requiring min of 50% - 75% of EE only premium. In this case, the "lowlies" are paying 20% of their premium meaning the employer is paying 80% of employee premium. No problem here.

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