125 Plan - New Employees Ineligible in the Future

[Brigette Renaud]

Client has a 125 plan and contributions are made to an HSA (generous contributions by company).  Client wishes to set up a separate track for medical benefits for all new employees hired after a certain date.  Legacy employees continue to get the same favorable benefits.  New employees receive an ACA compliant offer (perhaps with a premium only plan separate 125 plan).  Thus, the new employees would not be ineligible to participate in the 125 plan.

 

Any issues with this?

 

Thank you.

[Brian Gilmore]

Lots of variables here.  At a high level it could work if the carriers/stop-loss approve and it is clearly communicated in plan materials addressing eligibility.  

One potential area of concern (that I think you're hinting at here) is the 125 uniform election rule.  If this new class is eligible for the same underlying health plan options as the grandfathered class, there's a good chance that doesn't fly.  It would result in HCPs in the grandfathered class receiving a larger employer contribution (premium/HSA) than non-HCPs in the new hire class enrolled in the same plan option.  Those are likely "similarly situated" employees for 125 purposes.

More details:

https://www.newfront.com/blog/designing-health-plans-with-different-strategies

The key component of these rules for this purpose is the “uniform election” requirement.  That provision requires that employers provide a “uniform election with respect to employer contributions.”

A contribution structure that charges more to certain non-HCPs for the same benefit generally does not provide a “uniform election with respect to employer contributions”.  This means full-time non-HCP employees eligible for the same plan option as an HCP generally must be offered at least the same employer contribution amount that is available to HCPs for that same plan option.

Furthermore, in almost all cases the same Section 125 nondiscrimination rules apply to employer HSA contributions.  This means that employers will generally have to make the same employer HSA contribution amount available to full-time non-HCPs enrolled in the HDHP plan option as made available to any HCPs. 

...

Relevant Cites:

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).

 

Slide summary:

2025 Newfront Section 125 Cafeteria Plans Guide