Can a caferetia plan exclude a certain class of employees?

[Guest Tara Curran]

A client of ours is starting a cafeteria plan where the company is paying 90% of medical premiums and the employee is paying 10%. However, the client has a doctor who is considered an employee, but has an employment agreement where she is responsible for 100% of her medical premiums and the client does not want to pay anything on behalf of her health insurance. Can you set up a cafeteria plan that excludes a certain class of employees such as doctors? If you exclude these employees, any health insurance withheld from their pay will be after tax dollard through a separate contract, right?

[KIP KRAUS]

Tara;

I’m going to take a logical stab at this and assume that the doctor is a HCE for purposes of testing the discriminatory set up of the cafeteria plan. If so, since the regs. say only that you cannot discriminate in favor of the HCEs I’d conclude that you could discriminate against a HCE.

I would conclude that the client could set up the eligibility in the plan with two classes; doctors and all other employees provided there are no other doctors employed by your client. I wouldn’t expect that the doctor would want to pay after tax dollars for her medical coverage when she could do it on a pre-tax basis.

I also think there has been similar threads on this Message Board that discuss discriminating against the HCEs, but I don’t know how to tell you to get there.

[Moe Howard]

It sounds like your client simply does not want to pay the 90% for the doctor. If the doctor/ employee is going to pay 100% of his premium (through payroll withholding) then why would your client care if it's pre-tax to him or not ? Keep in mind that if the doctor/ employee pays 100% of his premium on a pre-tax basis, then your client would match no FICA (which would save your client money).

I think that the question you were really trying to ask is .... Can your client pay 90% of each regular employees' premium and pay "nothing for the doctor/ employee" ? The answer is yes .... but it has nothing to do with any cafeteria plan (Sec 125)rules. It has to do with Sec 105 ... which allows employers to choose which employees it will pay medical premiums for and which ones it won't. Under Sec 106 (of the US tax code), an employer can choose any similar group of employees to exclude from paying premiums for. Your client can therefore exclude (from employer paid premiums) all doctor/employees. The doctor can pay his own premiums through the cafeteria plan (pre-tax withholdings of course)... it will cost your client nothing & your client won't have to match FICA taxes on the doctor's pre-tax salary withholdings.