Cash payment to cover increased premiums

[youngbenefitslawyer]

Company and participating employers are consolidating benefit plans so that all employees participate under one plan.  As a result, premiums will increase for some employees.  Company would like to understand if it's possible to pay certain employees a stipend on a pre-tax basis that is used to cover the increased premiums.  The plan is self-insured, so my thought is that providing this payment to some employees and not others presents some discrimination issues.  Also, if the stipend is paid through payroll, can it be deducted pre-tax to pay for the cost of premiums?  

[Brian Gilmore]

The Section 125 cafeteria plan nondiscrimination rules are going to create issues here.  A "stipend" in this context would likely have to be a flex credit to meet the §125 requirements and avoid constructive receipt.  That flex credit would subject to the same Section 125 nondiscrimination issues as a simple increase to the employer contribution of the premium.  In other words, HCPs generally could not have access to flex credit amounts that non-HCPs do not.  The main exception would be for regional classes.

The workaround here is far more simple.  They can pay the affected employees more in wages.  If those employees use those additional amounts to pay for the increased cost of coverage on a pre-tax basis through the cafeteria plan, the net result can be the same for both parties.

• Here's more discussion: https://www.newfront.com/blog/designing-health-plans-with-different-strategies

Here's the relevant cite:

Prop. Treas. Reg. §1.125-7(c)(2):
(2) Benefit availability and benefit election. A cafeteria plan does not discriminate with respect to contributions and benefits if either qualified benefits and total benefits, or employer contributions allocable to statutory nontaxable benefits and employer contributions allocable to total benefits, do not discriminate in favor of highly compensated participants. A cafeteria plan must satisfy this paragraph (c) with respect to both benefit availability and benefit utilization. Thus, a plan must give each similarly situated participant a uniform opportunity to elect qualified benefits, and the actual election of qualified benefits through the plan must not be disproportionate by highly compensated participants (while other participants elect permitted taxable benefits)…A plan must also give each similarly situated participant a uniform election with respect to employer contributions, and the actual election with respect to employer contributions for qualified benefits through the plan must not be disproportionate by highly compensated participants (while other participants elect to receive employer contributions as permitted taxable benefits).Prop. Treas. Reg. §1.125-7(e)(2):
(2) Similarly situated. In determining which participants are similarly situated, reasonable differences in plan benefits may be taken into account (for example, variations in plan benefits offered to employees working in different geographical locations or to employees with family coverage versus employee-only coverage).

Here's a slide summary:

2024 Newfront Section 125 Cafeteria Plans Guide