An employer decides to help out an employee. Now, I'm worried about discrimination.

[katieinny]

An employee (not an HCE) was out on disability, so the employer decided to cover the employee's portion of his medical premiums for a few months. I asked if the employer has a policy of doing this for every employee in similar circumstances and the answer was no. The employer decides on a case by case basis whether to cover the employee's payments.

If the the employee was an HCE there would be no question about the answer. But can an employer discriminate among NHCEs?

[leevena]

Sounds like the employer has a problem. You identified the key issue in your comments, that being does the employer have a formal policy and is it available to all other employees in the same class. Good luck.

[E as in ERISA]

Make it a payroll issue instead. The employer decided to pay the employee more. The amount is equal to premiums. Add it to the W-2 and gross up taxes too. Then no problem with the plan.

[QDROphile]

There are no discrimination rules applicable to payment of premiums for group medical insurance policies.

[katieinny]

QDROphile: I just want to confirm your position, since your answer does not agree with the first 2 responses. The employer is not violating any discrimination rules (since there are none) by continuing to pay the employee portion of medical premiums on a case by case basis.

[E as in ERISA]

Is it a fully insured plan?

[E as in ERISA]

An employer can set up an insured plan and only cover HCEs and generally not have a problem. It's self-insured plans that have the discrimination issues. So I assumed from your comment about HCEs that it's self-insured.

But just to be cleaner many will handle the situation you describe as a payroll issue. So no matter whether its an HCE or NHCE they know they're okay each time.

[Guest b2kates]

There are no discrimination rules for a fully insured plan since the repeal of Section 89.

Section 105(h) imposes discrimination rules for self-insured plans.

[QDROphile]

Section 105(h) has discrimination rules, but applies only to self funded plans. Where are the discrimination rules for health plans provided through group insurance?

If you design a cafeteria plan to provide employer funding for medical benefits and the employer funding levels are different for different employees, you may fail cafeteria plan discrimination rules, but the original post made it sound like the employer just stepped in as needed to pay the premium.

The post for E as in ERISA did not state anything about discrimination rules, and my posts say nothing about compensation issues relating to the employer's decision to cover premiums.

[leevena]

These are all really good comments and thoughts. My comments earlier about this being a problem was coming from another perspective, or so I believe. This situation involves an employee who is out on disability and unable to work. The issue I was addressing is not the payment of premiums, but a " new benefit" which appears to be available to only a certain employee. It seems to me that if another employee was to become disabled, asked for this same benefit, and was denied, the employer would have a discrimination problem. I look forward to hearing the final on this one.

[katieinny]

Employees pay 60% of the medical insurance premiums and the employer pays the other 40%. In this case, the employer stepped in and paid 100% for the employee who was out on disability.

[E as in ERISA]

I think that the consensus is that with a nonhighly compensated, you probably don't have legal issues such as discrimination in this case. But if this is a common practice and may affect HCEs in other cases, then you probably want to know if this is an insured plan or self-insured and whether paid through cafeteria plan or not. Then you might have legal issues in other cases. One way to make sure that you can handle it the same in all cases without discrimination issues or other problems is to treat this as a payroll issue. Consider this additional compensation to the employee. And then honor a previous cafeteria election if one exists. Or pay taxes on the additional amount and gross it up.

[katieinny]

I forgot to answer the question about whether the plan is fully insured or self-insured.

It's a fully insured plan. Employees pay their portion of the premiums through the cafeteria plan.

So, it sounds like the only issue the employer would face is an employee morale issue if it were discovered that the employer can pick and choose the circumstances under which they will pick up the entire premium.

[Guest llerner]

If you follow what E in Erisa says, there should be no problem. Although fully insured health and welfare plans are not subject to discrimination testing in the sense that 401(k) plans or cafeteria plans via IRC code, they are subject to the Health & Welfare provisions of ERISA that basically say that employers should treat all employees of a class the same. The class is loose compared to HCE and KEY and does not necessary have to do with income or pay. Fully insured plans are an expense to a business, not a potential means to shelter income. When you think about it, the owner does really not benefit at all financially from providing health insurance since the cost of the benefit will usually outweigh any deduction for most employers.

Any logical group can comprise a class of employee (i.e. full vs part-time, hourly vs salary, management vs non-management. clerical vs professional, office vs warehouse and on and on). If the employer paid all the premium then the cafeteria plan would not apply unless the employer made a discriminatory contribution for example to the health flexible spending portion etc.

Also, you should look at applicable state laws and ADEA compliance if you have more than 50 employees.

[QDROphile]

Please identify the provisions of ERISA "that basically say that employers should treat all employees of a class the same."

[Don Levit]

A couple of other points come to mind.

First, if this is a payroll decision, could it be considered ministerial, and thus not subject to fiduciary concerns?

Or, would this be a settlor issue, a business decision, not subject to fiduciary concerns outlined in ERISA?

Also, because this person is disabled, does that open up benefits that he can receive, so that nondisabled people would not be discriminated against?

Don Levit

[RTK]

It might be helpful to separate the tax/Code and ERISA issues.

Tax first - no discrimination requirements for favorable tax treatment of contributions made to and benefits provided by fully insured group health plans, so no tax issues.

ERISA second - unlike tax law, ERISA is substantive law enforceable in court by participants. But generally, ERISA has no substantive requirements that apply to an employer's decision on what employees can be provided with medical benefits, the level of benefits, and the amount the employer will contribute to pay for those benefits (leaving aside COBRA, QMCSOs, portability and the like). Thus no general ERISA issues.

The issue that comes to mind is the extent to which the employer contribution made for disabled employees must be documented to comply with ERISA's requirement that there be a written plan document that (among other things) specifies the basis on which payments are made to and from a plan.

[JDuns]

Although there is no discrimination testing issue under 105/106 for a fully insured product, as mentioned by a few posters, there are still non-discrimination tests for the 125 cafeteria plan. Providing a discriminatory BRF could cause the cafeteria plan elections to be taxable compensation for the key employees.

[QDROphile]

What part of a cafeteria plan is a voluntary ad hoc decison by the employer to pay health premiums that does not in any way affect salary reduction amounts? The employer is not paying the premium in lieu of the salary reduction by the employee, or so it appears from the original post.

[JDuns]

Under 125 generally the benefits and contributions must be provided on a non-discriminatory basis (note that the HCE definition is not the same as the one used under the current retirement plan rules). Where a benefit is more highly subsidized for a group of employees, it may be possible to argue that the benefit or contribution is discriminatory. For example, the payroll subsidy could be treated as an match that is made available to a potentially discriminatory group.

In addition, under 125(g)(2) there are specific rules regarding the amount of subsidy for health benefits.

This leads me to the conclusion that there could be tax discrimination issues that should be evaluated.

There are also general legal discrimination issues if the premium is subsidized for a white 30 year old male and not for a 50 year old minority female.

[GBurns]

kateinny's subsequent posts explained that this was through a Cafeteria Plan under which "Employees pay 60% of the medical insurance premiums and the employer pays the other 40%. In this case, the employer stepped in and paid 100% for the employee who was out on disability."

So the employer is paying in lieu of the salary reduction from the employee.

[QDROphile]

GBurns raises a good point. If the salary reduction election is subverted, that is a problem. But we don't know if there is any pay that would be subject to the salary reduction agreement. We also don't know if there has been a legitimate change in the election. "Out on disability" could mean different things.

[E as in ERISA]

But what if you characterize what the employer did as providing compensation, not benefits. He pays the participant $100 a month while he's gone. If there is an election to pay $100 premiums through cafeteria plan through salary reduction, his net paycheck is $0. You run it through the payroll system the same as any compensation. It shows up on W-2 as paid into cafeteria plan, etc.

[mbozek]

I dont see any 125 issue if ee has not been paid wages. Er payments of health ins from the er's own funds are not included in tax income of ee under IRC 106. In other words the ee is not contributing to the 125 plan and the er is paying 100% of ees premium which is not subject to any discrimintion requirements.

[RTK]

Part of this may be what the cafeteria plan and the medical plan provide. It is not clear to me that the employer contribution is paid through the cafeteria plan. I saw nothing that said that an employee could elect to receive the employer medical plan contribution in cash. As a result, I read the comments to say that the employer makes an employer contribution to the medical plan, and a premium conversion cafeteria plan is maintained for the required employee contributions.

If the cafeteria plan is premium conversion only, most of the plans I have seen provide that to the extent the medical plan requires an employee contribution, the employee may elect between taxable salary and a pre-tax employer medical contribution in the amount of the required employee contribution. Thus, no choice is provided under the cafeteria plan for the "regular" employer contribution.

If so, the question then is can the employer make an additional employer contribution to the medical plan for a disabled employee. I assume that the employer wants to do this so that medical coverage can be maintained for the disabled employee, and not for the purpose of providing the employee with an election between an employer contribution for medical coverage or cash receipt of the contribution. If so, the contribution would be like any other employer contribution to a medical plan and should not be run through the payroll system.

All bets are off if the cafeteria plan is like the traditional cafeteria plan established after 125 was first enacted where the employer made a contribution to the cafeteria plan and employees could elect to have the contribution applied towards medical plan coverage (or other nontaxable coverage) or receive the contribution in cash (or other taxable benefits). In such case, an additional employer contribution for only some of the disabled employees would raise 125 discrimination issues that should be reviewed.

[katieinny]

This is a relatively small employer. The cafeteria plan is only for the payment of medical insurance premiums, no dependent care or medical expense reimbursements, etc. For some reason, the employer simply kicked in the employee's portion (60%) of the premium along with the employer's 40% while the employee was out on disability -- just to help out. I don't think he paid it by giving the employee more salary, but I can find out more details of exactly how it was paid if that will help.

[GBurns]

RTK

Employer contributions are not paid through the section 125 cafeteria plans, only employee contributions. These are then (as per the IRC) treated as employer contributions.

The choice to receive cash applies to the employee salary election.

[Don Levit]

GBurns:

You may want to look at Rev. Rul. 2002-3. It can be found at:

http://www.irs.gov/pub/irs-drop/rr-02-3.pdf.

It states, "The salary reduction used to pay for health insurance premiums under M's (the employer) payroll arrangement could be done with or without employee elections.

If an employee elects salary reduction pursuant to Sec. 125, the coverage is excludable from gross income under Sec. 106 as employer-provided accident or health coverage.

When M applies the amount of employees' salary reduction to pay health insurance premiums, the premium payments are made by M, not the employees, and are excludable from the employees' gross income under Sec. 106 because they are paid by M.

If the premium payments were instead actually paid by the employees out of the employees' salaries, the salary amount from which the payments were made would not be excludable from the employees' gross income."

If the 60% of premium payments were made inside the cafeteria plan, it seems that discrimination would be a concern.

Don Levit

[katieinny]

I asked the employer how the health insurance premium was paid. The employee was not getting wages, so there was no payment at all through the cafeteria plan. The employer simply paid the premium out of the corporate checking account. If I understand mbozek, there's no discrimination issue in that case, even if the employer decides not to pay the premium for another employee out on disability. The employer can continue to decide on a case by case basis whether or not he will pick up the employee's portion of the premium.

[Guest pedmund]

Your employer may have another issue to address other than discrimination. From your note, you indicated that this is a relatively small employer (so I guessing less than 50 employees) and therefore not subject to FMLA rules. My concern would be whether or not the medical plan covers employees "for several months" that are totally disabled. Most plan that are subject to FMLA rules only cover employees until they use up their FMLA and then they have to offered COBRA. Plans not subject to FMLA may or may not have provisions to cover employees that are totally disabled for any extended period of time. Is your employer continuing coverage on an employee that should not have coverage? If so, you may have to worry about the insurance carrier requesting refunds on any claims paid beyond the time allowed for coverage should this issue ever come to light.

[GBurns]

Don Levit

As I said and as the Rev. Ruling points out, the amount that relates to the Cafeteria Plan is the employee's share of the premium, not the employer's.