Health ins discrimination by employement class

[Guest cjsmith]

In preparation to revise our employee handbook a questions has been raised regarding the offering of employer-provided health insurance.

We want to say,

"Full time employees are those who work no less than 40 hours per week. Full time employees are eligible for employer-provided Health insurance, which currently pays 75% of the premium costs for employees and 50% of the premium costs for dependents. -- Part time employees are those who work less than 40 hours per week. Part time employees are nopt eligible for employer-paid health insurance."

So, both FT and PT employees can enroll in our health insr. plan... but, only those who work at least 40 hrs. per week are eligible for employer-paid premium portions. This should be legal, right? We are discriminating not on the eligibility of health insr. enrollment, but instead on the eligibility of employer-paid portions.

Thanks.

[Guest Sieve]

Right, this is legal.

[Ron Snyder]

It is legal but may result in discrimination and imputation of taxable income to highly compensated employees. For example, a company has 4 10-hour workdays for hourly employees, but they get a half-hour break, resulting in working only 37.5 hours per week. Managers and officers are salaried and are paid as though they work 40 hours although they don't punch a time clock. In this scenario the plan would discriminate in favor of the highly-compensated and to the extent that it does so, the excess portion (the percentage of compensation over the non-HCEs percentage) would be imputed as taxable and listed as compensation on for W-2 at the end of the year.

[Guest Sieve]

veba -- If this is a fully-insured health care benefit (as it apparently is), why is discimination an issue?

[Chaz]

veba -- If this is a fully-insured health care benefit (as it apparently is), why is discimination an issue?

If the HCEs pay their portion of their premium through a cafeteria plan, there are separate nondiscrimination rules that must be satisfied.

[Guest Sieve]

Correct. But, if the employee pays his/her portion of the premium entirely with after-tax dollars, and the benefit is fully-insured, then would you agree that disrimination is not an issue?

[jpod]

Assuming it is an insured plan, there may not be any 125 non-discrimination issues either. Don't POP plans basically get a free pass under the proposed regs?

[Chaz]

Correct. But, if the employee pays his/her portion of the premium entirely with after-tax dollars, and the benefit is fully-insured, then would you agree that disrimination is not an issue?

Yes. If the employer pays the full premium or if the employee pays with AT dollars, there is no cafeteria plan testing issues (because there are no payments through a cafeteria plan).

[Chaz]

Assuming it is an insured plan, there may not be any 125 non-discrimination issues either. Don't POP plans basically get a free pass under the proposed regs?

I refer you to Prop. Treas Reg. 1.125-7 for the cafeteria plan nondiscrimination rules. The rules apply to POP plans.

On an unrelated note, does anyone have any idea when final 125 regs are coming out.

[jpod]

Chaz: But don't the for POPs only require that eligibility for the POP be nondiscriminatory? In other words, there is nothing that would require the employer's subsidy be nondiscriminatory.

[masteff]

See also this recent thread: http://benefitslink.com/boards/index.php?showtopic=43465

[Chaz]

Chaz: But don't the for POPs only require that eligibility for the POP be nondiscriminatory? In other words, there is nothing that would require the employer's subsidy be nondiscriminatory.

See these examples copied and pasted from the proposed regs:

Example 1. Same qualified benefit for same salary reduction amount. Employer

A has one employer-provided accident and health insurance plan. The cost to

participants electing the accident and health plan is $10,000 per year for single

coverage. All employees have the same opportunity to salary reduce $10,000 for

accident and health plan. The cafeteria plan satisfies the eligibility test.

Example 2. Same qualified benefit for unequal salary reduction amounts. Same

facts as Example 1 except the cafeteria plan offers nonhighly compensated employees

the election to salary reduce $10,000 to pay premiums for single coverage. The

cafeteria plan provides an $8,000 employer flex-credit to highly compensated

employees to pay a portion of the premium, and provides an election to them to salary

reduce $2,000 to pay the balance of the premium. The cafeteria plan fails the eligibility

test.

Example 3. Accident and health plans of unequal value. Employer B’s cafeteria

plan offers two employer-provided accident and health insurance plans: Plan X,

available only to highly compensated participants, is a low-deductible plan. Plan Y,

available only to nonhighly compensated participants, is a high deductible plan (as

defined in section 223©(2)). The annual premium for single coverage under Plan X is

$15,000 per year, and $8,000 per year for Plan Y. Employer B’s cafeteria plan provides

that highly compensated participants may elect salary reduction of $15,000 for coverage

117 under Plan X, and that nonhighly compensated participants may elect salary reduction

of $8,000 for coverage under Plan Y. The cafeteria plan fails the eligibility test.

Example 4. Accident and health plans of unequal value for unequal salary

reduction amounts. Same facts as Example 3, except that the amount of salary

reduction for highly compensated participants to elect Plan X is $8,000. The cafeteria

plan fails the eligibility test.

[Guest Sieve]

Chaz -- I also saw those examples, & just deleted a post which I posted (for 3 minutes) which referred to #s 3 & 4, but they don't appear to address jpod's general statement that an employer subsidy OUTSIDE of the cafe plan is still permitted without impacting the cafe plan's POP provisions. The examples seem to indicate that plans of unequal value cannot be offered as POP in a cafe plan, taking into account (i) the health plan on its face, and (ii) subsidies inside the cafe plan. On that basis, the OP offers benefits of unequal value (no health plan vs. a health plan), so a POP cafe plan would be discriminatory--but if there was one health plan for all, with differeing employer subsidies outside of a cafe plan, that may be ok. (And, Prop. Treas. Reg. Section 1.125-7(f) requires POPs only to pass eligibility non-discrimination--which they may not be able to pass if there are different--i.e., unequal--underlying policies.)

But, without a POP cafe plan, and with a fully-insured health plan, the OP is correct--discrimination in offerring the benefit, or in subsidizing it, is not an issue.