Premium Only Discrimination Question

[Scott]

A company with an existing medical plan wants to establish a new medical plan for 3 of its executives which will provide for greater benefits than those offered under the existing plan. Currently, the company's cafeteria plan allows for pre-tax contributions of an employee's share of premiums. Under the new plan, the 3 executives will have a higher premium than all other employees, who will remain under the existing plan. Assuming that the 3 executives are all highly compensated participants (but not the only ones), will the fact that they will contribute a greater dollar amount in premiums to the cafeteria plan cause the cafeteria plan to be discriminatory? The medical plans are fully insured, so there is no discrimination issue under Section 105(h).

[This message has been edited by Scott (edited 06-07-99).]

[Joe Priselac]

As long as they pass the discrimination tests there is no problem with different people paying different amounts. In a Cafeteria Plan there could be multiple medical plans being offered from economy model to Cadillac model. The employer contributes the dollar amount or credit regardless of the medical plan chosen. If an employee chooses a Cadillac plan he pays more than one who chooses an economy model.

[Kirk Maldonado]

The problem is that you don't satisfy the nondiscrimination test. The highly compensated employees are eligible for, and actually do, contribute more to the plan than the other employees.

I've encountered this problem before where employers wished to reduce or eliminate the subsidy for the highly compensated employees. It's an absurd and counterintutive result, but I think it is the legally correct one.