Is this Premium Only Plan discriminatory?

[katieinny]

An employer pays X toward the premiums for everybody's health insurance. Some people want family coverage that costs more than the amount the employer pays. Therefore, they want to put in a plan that would allow these employees to pay the additional amount on a pre-tax basis.

Here's the rub -- it just so happens that the employees who need the family coverage are HCEs. The NHCEs are fine with just the amount the employer is paying so they don't need to use the plan.

The NHCEs would be able to jump in anytime they have a change in family status and need family coverage, but until then, is the plan discriminatory just because HCEs are the only ones using it?

[leevena]

An answer cannot be give with the information you supplied. The testing you are concerned about looks at the total amount of dollars re-directed, with a limit on the % that can go to the HCE's before the plan is discriminatory. I don't want to make any assumptions and give you an answer that is incorrect. Do you know what the % of re-directed dollars for HCEs is?

[GBurns]

Isn't the family coverage available to all employees?

Isn't the "extra" premium, that is needed, paid by the employee who chooses to get family coverage?

Is the employer contribution the same for all employees who choose the same coverage, regardless of whether or not that employee is HCE or NHCE?

[katieinny]

Leevena: No, I don't have percentage information. The employer is waiting to put the plan in place until we can answer the discrimination question.

Gburns: Yes, the family coverage is available to all employees and the dollar amount the employer has made available pays for single coverage and is provided to all employees. Only the employees who want the extra coverage (family) would be participating in the plan. Even though it is available to everyone, it seems that the NHCEs don't need the extra coverage, either because they are getting it elsewhere, or because they don't have families.

The stuff I've been reading is confusing. Some of it says that as long as it's available to everyone, it isn't discriminatory even though only the HCEs are participating. Other articles imply that it's strictly numbers driven.

[Guest mjb]

Why not just reduce the HCEs comp to pay for the family coverage and avoid the issue? Emplooyee does not have to make an election for employer to cover dependents.

[leevena]

Since the employer has not started the plan yet, you may want to take a survey of the employees and determine if there is a need for other benefits (FSA's) that might add some redirected dollars away from the HCE's and make your plan compliant?

[Guest mjb]

L: the solution is not that complicated. The employer can pay for the family coverage of hces which makes them ineligible to participate in a 125 plan. The employer establishes a 125/pop for the nhces and pays for the employee's coverage. The nhces can pay for family coverage with pre tax contributions without violating 125 because there are no contributions for hces and there is no requirement that employer contributions to an insured health plan be nondiscriminatory. All the employer needs is a 125 plan document permitting salary reduction for premiums.

[leevena]

MJB

I agree with some of what you said. However, according to Katieinny, the only dollars being redirected will be that of the HCE's contributions for dependent coverage. The single coverage is funded by the employer at 100% and none of the non-HCE's appear to want dependent health. If they choose your strategy (reducing pay to fund the dep cost) then there is no need for a 125 plan.

Here original question was "could you have the 125 plan if only HCE's had redirected dollars".

[E as in ERISA]

Might also depend on whether any hces are key employees? I think what most are saying is that it's not per se discriminatory. But there are potentially some numeric tests at the cafeteria plan level that would need to be performed annually to see if it was discriminatory. So no one can tell you the answer. But the health plan benefits themselves don't present a discrimination issue because that is an insured plan. So if you don't use the cafeteria plan to pay for that benefit then you know for sure you don't have an issue.

[Guest mjb]

L: The er can contribute family or single coverage for HCE insurance premiums as a deductible employer contribution without any redirection by ee. The NHCEs can participate in a 125 plan where er pays for single coverge and NHEs can contribute family coverage amt by sal reduction. There is no need for HCEs to participate in the 125 plan.

[katieinny]

Just to make sure I am understanding the gist of things:

The employer reduces the compensation of the HCEs that need the family health care coveage by the amount of the extra premium that's required to get the family coverage (the employer is already paying for everybody's single coveage). Now, the employer is making the premium payments for everybody, whether they've elected single or family coverage. He doesn't have to worry about any discrimination issues even though only the HCEs are getting family coverage. If an NHCE comes along that needs family coverage, he can tell the NHCE that he will NOT pay for the additional coverage for him even though he's doing it for the HCEs. He scraps the idea of putting in a cafeteria plan until some point in the future when the employee demographics change and enough NHCEs need family coverage so that the plan will pass discrimination tests.

Do I have it right?

[E as in ERISA]

I don't think I'd do it as a direct offset in pay. That is potentially a choice between cash and a nontaxable benefit. And the choice of cash makes that amount includible in income under constructive receipt or one of those rules -- unless it goes through a cafeteria plan. But the employer can pay directly for the family coverage if it wants. And it can pay for it out of the pool it will use for salary increases for HCEs or bonus pool or something.

[GBurns]

"Why not just reduce the HCEs comp to pay for the family coverage and avoid the issue? Emplooyee does not have to make an election for employer to cover dependents."

If the employer gives the HCEs the choice between Individual coverage and Family coverage and some HCEs who have families opt for Individual coverage and so get more salary than another HCE who opted for Family coverage, that seems to be a clear choice between cash and a qualified benefit. This should need a section 125 cafeteria Plan to take care of the constructive receipt issue etc. In any case a reduction in comp should need a salary reduction agreement.

It is possible that the solution would be 2 separate health plans. 1 for HCE with employer paid coverage as selected, no employee contribution for anything not even Dependent Care, and a separate health plan for NHCEs with a section 125 cafeteria plan so that they can pre-tax for Family or supplemental coverages.