Ramifications of Terminating Coverage for Employee's Nonpayment of Premium

[Guest rocnrols2]

Employer X has a sales force that participates in its cafeteria plan and is primarily paid by commission. Certain low-producing salespersons are not receiving paychecks for certain pay periods because their production is non-existent during some portion of the year. X wants to direct bill salespersons in this situation and then terminate coverage if their premiums aren ot paid for a specified period of time. The IRS Proposed Regs. at Section 1.125-2, Q&A-6((e) clearly authorizes the plan to termination coverage upon cessation of required contributions. This poses the following issues: (1) is there a minum amount of time an employer has to give the employee before his/her coverage is terminated during the remainder of the year?; and (2) can the employer require the employee to repay the defaulted premiums prior to the termination of coverage as a condition to being permitted to re-enter the cafeteria plan?

[GBurns]

Under fully insured coverage the termination date for nonpayment of premiums is as stated in the master policy.

However, you now have a classic problem, If coverage is terminated can the salary reduction agreement also be terminated without termination of employment or open enrollment time?

There might also be a problem with the sales reps not getting a paycheck. Have you checked to see if this meets the minimum wage requirements of FLSA and if these sales reps are exempt?

I do not think that you can condition reentry on the payment of back premiums, aside from the fact that demands regarding premium should be done by the entity to whom the premiums are owed, the insurance company, unless the employer had advanced the premiums, but then you have the question of whether the employee requested or authorized the advance.

In any case, if there are no earnings, How would the employee pay these back premiums, anyhow?

[Guest rocnrols2]

I'll respond to your last question first: it may be possible for the employee to earn commissions during certain parts of the year, less is other parts and none in still other parts. As far as the FLSA, that is an excellent question that I will have to find the answer to. I believe the rep would get a paycheck provided there are commissions. In some cases, the commissions may be insufficient to pay the premiums.

[GBurns]

Under the min wage requirements of FLSA if the employee is not in certain categories even though exempt from OT they might still be subject to min wage, which has to be paid in periods when there is no commission earned, that is why even waiters who work mainly on tips have also a min wage.

Then there is the problem of making a deduction in a low earnings period when the deduction will reduce the earnings to below min wage. Some states yes, some no.

I suggest that you find out what the job is and post your question on 1 of the HR/Payroll focused Boards.

[Guest nobletorch]

This is a mutli-edge question. The answers while correct are not dealing with this in a sequential manner. The steps I would go though are:

· Determine the FLSA classification.

· Does the employee earn minimum wage each pay period?

· Is an employee in this role eligible for the plan

· If yes, what is the employee’s contribution – what is the employer’s contribution

· If the employee earns only the minimum wage during a specific pay period will that amount cover the deduction? (Remember – the minimum wage is before deductions not after – as implied in one answer).

· If the amount of the paycheck does not cover the deductions – what will be company’s policy?

o Before making a decision review other policy decision your company has made regarding voluntary deductions – i.e. bonds, savings, etc. do you allow catch-up.

o Review the number of employees impacted by the decision

o Review the impact to other voluntary insurances

· Forecast turnover issues – probably not so much from retention but from a recruiting standpoint. (Well, Mr./Ms Applicant, this is a great place to work, but if you don’t meet your sales requirement we will cancel your medical coverage).

· Create a policy

My opinion is that the approach you are suggesting is going to cause more problems that it will solve.

[GBurns]

nobletorch

Welcome to the Board. That was an excellent post. I wish I could have said it as well as you did.

I look forward to more.