Employer Paid Premiums - Discrimination?

[waid10]

Employer contributes an amount equal to 18% of employee's salary toward the organization's health plan premiums. If the 18% is more than enough to cover the premiums, then the excess is contributed to the employee's 403(b) plan account. If the 18% is not enough to cover the health plan premiums, the employee must pay for the difference.

Is this arrangement legal? Since the 18% is based upon individual employee salary, higher paid employees are going to get a higher contribution. I know that 403(b) plans are not subject to discrimination testing, but what about health plans (particularly regarding employer contribution for premiums)? I think this is a fully-insured health plan.

Thanks.

[QDROphile]

Have you read 403(b) (12) lately? Or is this a government plan? If it is a government plan, state and local law will apply.

[Guest b2kates]

In a fully insured plan, the employer may always discriminate regarding premium payment and participation. the nondiscrimination rules only come into play for self-insured under IRC 105(h) and a cafeteria arrangement

[Don Levit]

Brett:

In this situation, the employer is offering to tie the employer contribution to the premium, based on a percentage of salary.

While the gross premium should be the same (non discriminatory), the net premium would be lower for higher paid employees.

Are you saying this is not discriminatory, merely because the net premiums are based on compensation, rather than health?

Don Levit

[Guest b2kates]

no, I am saying that it does not matter, as a fully insured plan may discriminate as to participation; and accordingly the amount of premium paid by the employer on behalf of the participants.

[Don Levit]

Brett:

Is discrimination not an issue, due to the plan not being an ERISA plan?

Can you cite any regulation in support of your opinion?

Thanks.

Don Levit

[Guest b2kates]

Don, discrimination is not an issue because under 105 of the IRC, discrimination is only applicable to self insured plans under section 105(h). there is no discrimination rule for fully insured plans, only the requirements under the insurance contract.

[Don Levit]

Brett:

The non discrimination rules for self insured plans under Sec. 105(h) apply to eligibility to participate and to benefits.

Under the scenario introduced by waid 10, there did not appear to be discrimination in these 2 areas.

For example, the medical benefits available appear to be the same for all employees, as well as the premiums.

What is not the same, however, is the employer-paid portion of the premium.

I do not read anywhere in section 105(h) where this is relevant.

However, that does not mean that unequal employer reimbursements for premiums is not discriminatory.

Why do you think there are comparability rules for employer-paid HSA contributions?

Don Levit

[Locust]

1. Insured health. Don - I think we're having a failure to communicate.

Discrimination is not prohibited under 105 for insured health benefits. You could have a plan that paid 100% of the premium for all highly compensated employees, and 10% for nonhighly compensated employees. Whether you could find an insurer that would write up such an arrangement (because of state law and underwriting) is another question.

2. 403(b). QDROphile is right. Read 403(b).

[GBurns]

Don,

ERISA is not an issue. Almost every employer provided group health plan (except very small groups) is an ERISA plan.

Regarding "However, that does not mean that unequal employer reimbursements for premiums is not discriminatory", there is no "employer reimbursement" mentioned in the OP. The issue is payment (or amount) of employer contribution to the employee benefits program.

****************

The use of a Benefits Credit is quite normal, the issue is whether it can be a % of compensation or whether it has to be a flat amount. In my experience a flat amount is what I usually see, but even then the flat amount varies by the employee classification.

I do not think that a % of compensation in a health plan is any more discriminatory than the employer matching % in a 401(k) etc.

[Don Levit]

George:

Take a look at another post today on employer matches for 401(k)s.

It seems the match can discriminate for lower paid employees, not higher paid employees.

No one seems able to address my question regarding employer comparability provisions for HSAs, and how this may relate to discrimination under waid 10's scenario.

Locust:

I understand fully well the difference between insured and uninsured.

You brought up the possible conflicts between state and federal law in reagards to whether the plan can be offered.

Do you know of a particular situation, in which this plan has passed legal muster?

Don Levit

[Locust]

The insurance issue is whether an insurer can or will sell a group policy that cuts out a number of employees by having more stringent conditions for participation, such as requiring them to pay more for their coverage than highly compensated employees. State law may prohibit such practices for the group insurance contracts it allows to be marketed in the state. The insurance company may prohibit it for underwriting reasons.

In order to be a "group" plan with group rates, you have to have a legitimate group - not one that is restricted to the owners. It depends upon what the provisions are - if everyone has to pay the same fixed cost, or if highly compensated have to pay more, then its probably not a problem (these could not be considered discriminatory under any scenario).

The insurance contracts that I see have certain requirements - such as that all full-time employees of the employer have to be allowed to participate and not more than 50% of the cost of individual coverage can be required to be paid by the employee. These types of provisions are in there because of state law and underwriting requirements - and this is where I think a discriminatory health plan will run into problems.

[Guest AMP]

Don,

There are comparability requirements for employer contributions to HSAs because HSAs are a form of secured deferred compensation. Employer contributions made in the current year can be used in a future year, the employee has full ownership and control over the employer contributions as soon as the contributions are deposited into the HSA, and the employer contributions are nonforfeitable as soon as they are deposited into the HSA. As with all forms of secured deferred compensation, the Code imposes restrictions on what an employer can contribution for highly compensated employees.

The OP doesn't involve HSAs. It only involves the employer's payment of premiums for fully insured group health care coverage, which generally do not result in deferred compensation. Code Section 105(h) only imposes nondiscrimination requirements on benefits provided under a self-funded health care plan. There are no nondiscrimination rules in Code Section 105(b), excluding from taxable income medical care benefits not provided through a self-insured health plan, or in Code Section 106, excluding from taxable income any employer-provided coverage under an accident or health plan. (Treas. Reg. Section 1.106-1 applies the exclusion under Code Section 106 only to employer contributions paid as premiums on an insurance policy or as contributions to a separate trust or fund that provides insured benefits. Code Section 106 does not apply to employer contributions to a self-insured health care plan.)

But the OP may raise an issue under Code Section 125 if any remaining premium is paid by employees on a pre-tax basis. If any remaining premium is paid by employees on an after-tax basis, Code Section 125 obviously does not apply.

And I agree with Locust and QDROphile that the employer contributions to the 403(b) plan made with the "excess" employer contributions for health premiums are subject to the nondiscrimination requirements in Code Section 403(b)(12), presuming that the employees are not permitted to elect to receive the excess employer contributions in cash. Only salary deferral contributions to 403(b) plans are excluded from nondiscrimination testing.

[Don Levit]

AMP:

Would you agree with Locust that state laws must be considered for fully insured plans to determine if this type of scenario would be permitted?

Do you think that there are no discrimination provisions for fully insured plans, precisely because the states DO have laws addressing the iszsue?

Don Levit

[Guest AMP]

Don,

Yes, as Locust pointed out, both state laws and an insurance company's individual underwriting requirements may prohibit an employer from making different employer contributions for different groups of employees covered by the same insurance contract.

And yes, I think the Internal Revenue Code doesn't impose nondiscrimination requirements on fully insured plans because of the regulation and oversight of state insurance laws and agencies.

AMP