HCE Coverage & Discrimination

[Guest pension222]

The employer offers health insurance to its employees and pays almost all of cost for single coverage and some of the cost for single+1 and family coverage.

It sponsors a 125 plan that allows employees to choose benefits and to allow for pre-tax payment of insurance not provided for by the employer.

However, the company pays 100% of the health insurance premium for some employees. I am confident that some will be classified as highly compensated participants under Code Section 125(e) and some will be classified as key employees under Code Section 416(i)(1).

Can this payment of 100% of the premiums for certain highly compensated and/or key employees pose a discriminiation problem? Can it be a problem under the 125 plan?

I guess the logical extension is "can an employer pay 100% of the premium for HCE's and 0% for non-HCE's" and does the answer depend on if the premium for non-HCE's is paid through a 125 plan?

I'm a pension actuary and this just sounds like something is wrong but maybe not.

[GBurns]

The employer premium is never paid through the section 125, only employee choice between cash and qualified benefits goes through the 125.

If the employer pays 100% there is nothing left to pre-tax.

What is being pre-taxed is the employee portion to cover an employee share or to cover additional choices that the employee voluntarily made.

Even if it is a benefits credit type of scenario roughly the same is true.

The employer can pay 100% for HCEs and 0% for NHCEs provided they are separate classes of employees under the Plan Documents. The employer could have an Executive Plan and a Service Workers Plan. As long as they are separate and there is no discrimination within the class it can be done, usually.

I do not remember "key employees" being a consideration under 125 so you might want to look it up.

[Guest pension222]

Code Section 125(B)(2) says: "Key employees. - In the case of a key employee (within the meaning of section 416(i)(1)), subsection (a) shall not apply to any benefit attributable to a plan [year] for which the statutory nontaxable benefits provided to key employees exceed 25 percent of the aggregate of such benefits provided for all employees under the plan. For purposes of the preceding sentence, statutory nontaxable benefits shall be determined without regard to the last sentence of subsection (f)."

Does this make any difference to GBURNS answer?