Is this discriminatory

[SLuskin]

I met with a prospect the other day. A law firm has a pop plan "administered" by their payroll service. For their health insurance, in the base plan, the firm pays 100% of the employee premium for all, and 100% of the dependent premium for attorneys only. All of the firms HCE are attorneys and none of the non-attorneys are HCE.

I told them that this was discriminatory, because not all of the pretax benefits were equally available to everyone. I know that you can offere benefits to some classes of employees and not others, i.e those in New York but not in California, or mechanics but not shipping clerks. I didn't see this as being the same because in the 2 examples I just gave, there isn't a clear division of HCE and non-HCE.

In this case, if I am a secretary who wants to cover my family, it will cost me $800 per month and if I am an attorney, it will be free. The secretary can pretax her $800. If the attorney buys up, the attorney can pretax the difference between the base plan premium (free) and the richer plan premium.

Any insight would be helpful.

[J Simmons]

There is no nondiscrimination requirement in IRC section 106, which is what keeps the value of the insurance coverage paid by the ER out of the taxable incomes of the EEs. Ergo, the ER can discriminate in this way. This could be a problem if the payment of premiums by the ER is embedded int he POP document language, rather than leaving the POP only for employees to use to pay premiums the ER does not pay aside from the POP.

[Ron Snyder]

While I agree with the Section 106 analysis, don't the nondiscrimination Regs under Section 125 apply to a POP?

[J Simmons]

Whatever portion the ER is going to pay in premiums may be done under 106a, outside of the POP. The POP would not mention what part of the premiums the ER is paying. The POP would be reserved for the sole purpose of giving EEs an election to pay the remaining premium cost with pre-tax payroll reductions. Ergo, the POP is nondiscriminatory--unless outside the POP and under 106a the ER pays more of the premium for the lower paid EEs, leaving POP usage to be greater by the higher paid EEs.