Employee contributions (voluntary) to health premiums of other employees

[Guest marktitelbaum]

I was wondering what information might be available with regards to considering a plan to allowing highly compensated employees to "donate" money to help offset the costs of the lower tiered staff's health insurance? Some the things I am wondering need further considerations include:

Ø What the tax consequences would be (if any), if a voluntary "deduction" for staff were created?

Ø Would this be an after-tax or pre-tax deduction and/or contribution?

Ø Would it be considered taxable income for the staff that receives it?

Ø Might there be any roadblocks to such a proposal?

Ø Any thought as to any issues that might need to be considered if something like this were enacted?

Thank you!

[mbozek]

What are u trying to do? an employee is taxed on anything he receives from an employer. If the ee takes a pay cut then the employer can use the extra funds to provide tax free health benefits. The employee cannot receive a deduction for transfering taxable wages to other employees.

[Guest marktitelbaum]

What the management of this company is ultimately looking at is the following:

Ø There are presently three premium tiers - Under $50k, $50k - $100k, and Over $100k;

Ø Prior to the 2006 premium rates being applied, those making over $100k were contributing close to 50% and those making less $50k contributing close to 22%;

Ø With the 2006 premium rates, the increase will be felt across the board with the HCE's having their (EE) contribution reduced to 45% with the LCE's having theirs raised to 25%.

The LCE are seeking more equity so management is viewing whether the HCE's might want to voluntarily contribute additional to help offset the brunt of the increases on the LCE's....

[leevena]

I think this is very nice gesture on behalf of the HCE's, but not the best option available. I agree with MBOZEK that this does create a taxable event. Addtionally, it might even create unforseen issues with moral and relationships with the employees. You will now have "better off" employees "helping" those with less. Seems like a receipe with some substantial problems. Without knowing much of the detail, it seems like you have a fairly standard issue, that of the employee costs beginning to be too much for them to fund. And, as time goes on, you may start to have participation problems. I would look at other alternatives before ever thinking about what you are proposing now. Can you reduce the benefits available? Can you reduce salaries and redirect those dollars to benefits? Are all the possible cost reductions in place? Good luck.

[Don Levit]

This is a very practical concern as well as a compassionate one.

Participation problems can be very real, with most insurers requiring 75% participation.

Have you considered the idea of using the "community rates" of group insurance for purchasing x amounts of benefits per premiums paid?

A person who pays double what one individual pays would get double the benefits?

Don Levit

[Guest marktitelbaum]

As an update, the company has decided to shelve this idea. While it seemed like a good gesture for a few, it was hard to get a sense of the true participation by a number of those in the higher tier. The company eventually moved towards a structure that retained the lower tiers cost split and reduced the others downward.

[Guest gdburns]

Don

Outside of state small group laws which dictate the use of "community rating" for groups with under 50 employees, most insurance companies use "experience rating" to set the premiums charged. The choice of which is used is decided by the insurers not by the employer. I do not think that an employer could even make the request. It also probably would not be allowed under state law either.

[Don Levit]

gdburns:

I was thinking of the small groups, in which the premiums do not vary due to health status.

Each employee has the same premium, for example, for employee only coverage.

The insurer has provided a community rate, in which x amounts of benefits are provided.

If an employee pays none of the premium, of which half is paid by the employer, what is stopping the insurer from offering a plan of one-half the benefits?

You will probably respond that the insurer cannot do this, due to state insurance regulations.

As you know, ERISA plans have various parties.

Which party would be the insurance company? As that party, if applicable, would it have the right to structure the plan? Or, would its rights under an ERISA plan be merely to fund the benefits selected by the plan sponsor due to its party status as a sponsor?

Don Levit

[Guest gdburns]

Insurance products can only be provided if they are filed and approved by the Dept Of Insurance. This not only costly but time consuming. So as a result the choices are limited. Because they are limited, the employer and employee have to choose from what is offered and what is offered is offered with a set payment structure. The decisions about the amount of premium and the sharing of that premium must be done in advance. Nothing stops the choices being 50/50 and the other being 0/100 premium sharing. Nothing stops a X and 2X benefits plan. Except that X and 2X (with their respective premium structures) must have been filed and approved first.

Insurance companies are usually not subject to ERISA. ERISA generally applies to plans, plan sponsors, service providers (such as fiduciaries and Trustees etc) and plan participants. Insurance companies do not provide benefit plans, they provide the coverage that the benefits plan makes available to participants. As a result they neither have rights nor do they fund plans. In fact, insurance companies have nothing to do with Plans, they deal with insurance policies.

[Don Levit]

gdburns:

I agree with you that insurance companies have nothing to do with plans. Their function is with policies, not ERISA plans.

It is not the insurers' function to merely offer policies that the state has approved to ERISA plan sponsors.

It is the insurers' function to offer policies that are of value to the plan sponsor, which may well be policies that do not match the state's approved guidelines.

What the state requires of the insurer to offer has little relation to what the plan sponsor can choose to provide for the employees. This state "approved version" can serve as a good starting point for discussions.

Indeed, for both the insurer and the sponsor, there needs to be a "give and take" process.

In that situation, if the "negotiation" is successful, the insurer would need to ask for authorization to sell the amended version.

What is stopping an insurer from doing so, as well as prohibiting the insurance commissioner from approving the amended version?

Don Levit

[Guest gdburns]

Don,

We are not in Kansas anymore!

The function of the insurers is to make a profit for their shareholders. Insurance companies are businesses. To stay in business a profit must be made.

Insurers are not public benefactors and do not offer what is in the public interest. They offer what is in the company's interest.

There is only "give and take" between sponsor and insurer if the group is large enough. One reason is that only a large enough group will provide enough profit to absorb the costs of developing and filing a new "negotiated" product (assuming it is an insured product). There has to be enough profit to absorb the extra administration caused by having to do special claims payment runs etc. Self-funded plans while not having the filing costs, still have the other costs.

There are not enough large enough groups to make this "give and take" a popular practice.

So essentially, it is the amount of potential profit that stops the insurer.

[Don Levit]

gdburns:

I agree with you that insurance companies are primarily responsible to their stockholders.

The departments of insurance, however, should be more sensitive to the public interest, as well as to the interests of insurance companies.

The expensive costs you mentioned regarding filing should be streamlined, IMO, for "experimental" policies.

These plans would be amended policies (at least amended from the standard group plans available for sale).

By the way, do you (or others) have any idea how departments of insurance handle group-type plans? These plans, by definition from the NAIC, are intended to be those NOT offered to the public.

Happy Thanksgiving to all!

Don Levit

[Guest gdburns]

I have never heard about this "NOT offered to the public" before. Where did you see that? What does "Public" mean?

I do not know of anything special about the treatment of group plans by any DOI. They are treated as the law requires just like individual plans and any other regulated items are? What do you mean or What are you thinking of? Why would there be any "handling" other than what is required by law?

The "expensive costs" involved with developing a new policy and filing it are very streamlined. This has always been an area under cost cutting measures by the insurance companies.

But the greatest cost is in the administration of something that is different. That is why a custom suit is more expensive than an "off the rack" suit. Standard policies have standard procedures and therefore get standard processing using regular staff. Custom or variants cannot be run along with the standard policies using standard procedures etc. They need special processing by specially trained staff.

I would think that it is impossible for any DOI etc to do anything more specific for the "public". The main reason is that it is not possible to know what the public wants because the public has no idea what it wants, and the public has no idea what is available and possible. So the products are left up to the employers and the insurers.

Remember, that as far as group plans go, it is the employer who is both the buyer and the policy holder. The insurance company like any other company deals with the buyer. The employees (the public) do not buy group insurance. If the employer decides not to provide or sponsor a group plan, the employee has nothing. That is why IRC sections 105, 106 and 125 etc are worded as they are with the emphasis on "employer provided". The employee only rides along as a certificate holder and participant in the employer's plan.

[Don Levit]

gdburns:

You have said quite a bit here, so I will try to limit it to more specifics.

"Group-type plans" are found in many state insurance codes. Their definitions pretty much mirror that of the NAIC.

For example, to take Kansas' insurance code, since you seem to have an affinity to be there:

"Group-type contracts are contracts which are not available to the general public and can be obtained and maintained only because of membership in or connection with a particular organization or group. These "group-type" contracts are distinguished by 2 factors: (1) they are not available to the general public, but may be obtained only through membership in, or connection with, the particular organization or group through which they are marketed; and (2) they can be obtained only through such affiliation."

Of course, these plans can be fully insured or self insured.

Don Levit

[Guest gdburns]

I do not remember having seen the term before. It reads similar to "Association" and "Affinity Groups" etc.

That they require membership takes them out of availability to employers and therefore employees. Having employers participate probably would cause MEWA issues even if the terms and coverages were attractive.

The terms and coverage are not usually attractive which is why these have not enjoyed popularity.

Since they would be NOT employer provided, they would lose the tax deductions and tax free benefits.

Since they are not employer provided there could be no "give and take" or negotiation between employer and insurer, thereby eliminating any possibility of designing a plan to better meet employee requirements.

It is probably because of the lack of employer involvement why most of these "group type" items do not have much medical coverage but mainly cover AD&D, Accident, Disability etc. Have you seen any that cover medical? Who offers them?

[Kirk Maldonado]

I think that everybody has gotten sidetracked, or at least the situation could be handled in a much simpler fashion.

There is no issue involving the insurance company; this matter only involves the amount that the employer subsidizes the premium for the different classes of employees.

If the employer unilaterally lowers the subsidy for all of the higher-paid employees while simultaneously raises the subsidy for all of the lower-paid employees, I don't see a constructive receipt issue, because the higher-paid employees are not given the choice as to whether or not to receive the lower subsidy. That is a very simple solution, although it might not be too palatable to the less charitable members of the highly paid group.

Besides the tax issue, I don't see allowing the higher-paid employees the choice is administerable. For example, would you have to recompute the premiums for the lower-paid employees part way during the year if a number of the higher-paid employees who donated some of their subsidy were laid off or quit?

[Guest gdburns]

But would "higher-paid employees" be an acceptable classification?

[Don Levit]

Kirk:

On first thought, I tend to agree with gd burns.

On second thought, however, if you use the "standard" classification of HCEs, if you discriminate against them, would this be acceptable? I am aware that in some situations, this would be kosher.

Don Levit

[Kirk Maldonado]

What nondiscrimination rules are you worried about violating?

[Don Levit]

gdburns:

Group-type arrangements are sponsored by employers or employee organizations, whether MEWAs or single employers.

Because of this, the plans can qualify as ERISA plans.

They are allowed tax deductions as well.

Due to significant employer involvement, the terms and conditions can be tailored to the needs of the employees.

I do not know of any of these arrangements in the marketplace.

However, these regulations are in many states' insurance codes.

Again, I mention this as a way to alert people they may have options for innovation and creativity, possibly without new laws needing to be passed.

Don Levit

[Don Levit]

Kirk:

This is like a soap opera with 2 stories going at the same time. Keeps this thread interesting!

I see the employer subsidy issue of various amounts being similar to the HSA comparability rules.

How can the employer provide different dollar subsidies for employees, if, for example, the premium, per employee, is the same?

Don Levit

[Guest gdburns]

Don,

Group type arrangements are sponsored by Associations, Co-Operatives and unions etc not by employers.

What does it matter if ERISA or not?

I do not see how an employer would qualify. As per the Kansas quote that you gave, eligibility requires " membership in or connection with a particular organization or group". Can you provide a cite or link to where you found the Kansas information?

Under what sections of the IRC (Treas Regs) would the tax deductions be available?

The Plans are pre-designed, pre-filed and are not subject to being tailored for anyone. There is no employer involvement significant or otherwise. See what is offered by your local state Bar, state CPA and possibly the larger Chamber of Commerce.

You point out that you "do not know of any of these arrangements in the marketplace" which raises the question of How do you then know how they work?

[Kirk Maldonado]

Don:

You didn't answer my question, which is:

What nondiscrimination rules are you worried about violating?

I am looking for a specific citation in the Internal Revenue Code or the regulations that states that this arrangement violates some specific nondiscrimination rules.

[Don Levit]

Kirk:

Very good question.

How about this:

Plans may not require an individual to pay a premium or contribution greater than that for a similarly situated individual based on a health-status related factor.

IRC Section 9802(b)(1)

[Don Levit]

Group insurance arrangements are also sponsored by employers.

I read "group" in this section of the Kansas regulations to mean a group of employees.

By the way, you can find this regulation in the Kansas Benefits Model Regulation, K.A.R. 40-4-34.

Not only must an employer be the sponsor; it must be actively involved as the sponsor.

The fact that these plans may not exist may not mean they cannot work.

I am only suggesting a route that is different from the plans out there.

Don Levit

[Kirk Maldonado]

Don Levit:

The language you cited said the plan can't charge more for a health-related condition, but it doesn't say you can't charge more for your highly compensated employees.

[Don Levit]

Kirk:

Good point.

My only comment is that, instead of discriminating due to health status, the employer is discriminating due to "affordability" status.

I have thought for a while that the laws are too focused on discrimination due to health, that the end result is to discourage the healthy and not so wealthy from participating in group plans.

Why not have the total premium for each employee be one that is negotiable?

Assuming the employer subsidy is the same, have the total benefits be in direct proportion to the total premiums.

VEBAs can be set up this way.

Don Levit

[Guest gdburns]

Don

The issue is "group type" not "group".

While "group" applies to a group of employees, it does not mean that the "group of employees" can negotiate, buy or sponsor anything. It is the employer who negotiates, buys and sponsors. The employer is who has the eligible status. It is the employer whose status determines whether "Group" is available or "Small Group".

Group insurance is available to employer groups. Group type plans are available to associations, union etc and usually do not cover medical expenses.

In an earlier post you claimed to be quoting from the Kansas Insurance Code. Not seeing such wording before and wondering if had misunderstood and taken it out of context, I asked you for a cite or link. You responded by stating that "you can find this regulation in the Kansas Benefits Model Regulation, K.A.R. 40-4-34"

K.A.R 40-4-34 ( http://www.kslegislature.org/legsrv-kars/s...1D3E6690622FE1D ) reads differently than you state and seems to deal with COB, a different issue entirely:

40-4-34 Accident and health insurance;

coordination of benefits; guidelines. Sections

3 through 9, including appendices A and B of the

national association of insurance commissioners'

``group coordination of benefits model regula-

tion,'' January 1996 edition, are hereby adopted

by reference subject to the following exceptions:

[Larry M]

In the days when I had hair, and could read without a magnifying glass, the "group-type" plans to which Don Levit refers were called "franchise plans". They were hybrid policies - with a mix of individual and group features and which were not subject to all the very strict rules and regulations concerning individual policies (concerning renewability, pricing and the like) and which could be offered to certain types of groups (e.g., associations) without requiring the normal group participation and employer contribution.

As for discrimination, I am strongly in favor of allowing every employer as much flexibility as the employer can have. Unfortunately, there are a number of employment laws (federal and state and municipality) which limit some of the flexibility; and there are a number of (usually) reasonable insurance underwriting requirements which limit the employer in other directions.

Don, With respect to another aspect of your comments, I am not sure what you mean by "total premium for each employee be one that is negotiable".

If you are suggesting having an employee's premium rate individually adjusted to provide for exactly that person's benefits, plus expenses of handling the benefits (marketing, administration, taxes, etc.), this could be done theoretically. However, it would mean that the individual who becommes ill and uses a lot of medical services and supplies, would have to pay an extraordinary amount, while all those (the vast majority of employees) who had no claims (or very small claims) would pay a small amount on their own behalf. [imagine a fire insurance option which, for the nominal sum of $5 per year, will allow you to receive an insurance policy for your house which will allow you to reimburse yourself for the value of the house and contents lost in a fire?]

Alternatively, if you are suggesting where the employer has an average rate per employee which is needed to cover all expenses and benefits, in total, then each employee can negotiate, with the employer, how much he or she will pay, below, equal to, or above the average, how could that work? Which employee, knowing the average, would agree to pay more?

However, if you are suggesting the employer set up a tiered plan, where employees can choose the benefits of any one of the tiers and pay its corresponding premium, then this is something which is available currently and in practice.

[Don Levit]

gdburns:

I agree with you that it is the employer who negotiates, not the employees.

How do you understand that group-type programs do not apply to single employers? Yes, it is used (or was used) primarily with associations, franchise, or blanket coverage. And, it certainly can be used for medical benefits. I have not seen in any of the state insurance codes that group-type insurance does not apply to single employers. In fact in several of the codes, this term is referred to as group OR group-type plans.

The main point I am trying to make is that these plans can be structured differently, for one of the key components is that the plans are generally not available to the public.

Seems like a ripe invitation for fully insured and self insured plan sponsors to put on their thinking caps.

Don Levit

[Don Levit]

Larry M:

I am suggesting a combination of plans 2 and 3 regarding "negotiable" premiums.

We know with each employee having the same premium for group insurance for the same benefits, that if an employee (and employer ) pay that premium, they have the full benefits.

By paying half the premium, they have half the benefits.

In this way, employees can more tailor their coverage to their needs and their pocketbooks.

I mentioned that the VEBA does allow for premiums and coverage to vary in this type of fashion.

Don Levit

[Guest gdburns]

A VEBA cannot and does not allow anything. A VEBA is really a funds holding mechanism. It does not determine premium structure, in fact it has no relevance to either the premium structure, the benefits offered or the scope of coverage.

[Don Levit]

gdburns:

A VEBA is a tax-exempt entity created to fund various benefits, one oif which is medical benefits.

A VEBA may be established by an employer or through collective bargaining.

As I mentioned, one of the unique qualities of a VEBA is that benefits can vary by contributions made.

In reg. 1.501©(9)-2(a) it states, the allowance of different benefits based solely on differences in contributions is permitted, provided that those making equal contributions are entitled to comparable benefits.

Don Levit

[Don Levit]

Folks:

Here is an interesting bit of information I just came across regarding "discrimination" in retirement plan contributions for employees. I wonder if this may be applicable to medical plan contributions for employees.

It describes "burdensome contributions" for retirement plans.

In code section 401, under (g) (all I have, at this point), it states, Sec. 1.401-3(d) of the regulations provides in part, If a contributory plan is offered to all of the employees, but the contributions required of the employees are so burdensopme as to make the plan acceptable only to the highly paid employees, the classification will be considered discriminatoryin favor of such highly paid employees. As a general rule, however, employee contributions of 6% or less are not deemed to be burdensome.

Assume the employer provides contributions in equal amounts to all employees for medical benefits.

Assume also that some employees will have to pay more than 6% of their compensation to pay the balance of the premium.

Is this plan discriminatory?

Don Levit

[Guest gdburns]

That is exactly the point ... it is used "to fund various benefits" not to negotiate, provide etc etc. It is used to fund whatever the employer decided to buy and to provide. It serves to make sure that the funds are available when needed and protected until such time.