NOTE:The answer to this question requires compliance with both the HIPAA Nondiscrimination Requirements and the IRS Section 125 Nondiscrimination Rules. IRS Nondiscrimination Rules apply when employees make pre-tax paycheck contributions for employee benefits using a Section 125 Premium Only Plan (POP). If you are a client of Benefits Cafe we will assist you with setting up your plans so that they comply with these rules. If not, you should make us your broker. Call us at 800-746-0045.

Some of our employer clients have asked: “Can an employer contribute different amounts towards employee medical insurance for different employees?” Employers often treat employees differently (for example not all employees earn the same wage). However, they don’t want to violate any discrimination laws. We are not attorneys and don’t give legal advice. We do understand the insurance company underwriting process and want to shed some light on this question.

“Employer contribution” is the insurance industry way of describing the amount an employer pays towards an employee’s medical insurance. If an employer offers a group health plan then California state law requires an employer to contribute a minimum amount towards the cost of the employees’ medical insurance. Insurance companies differ in the minimum contribution amount. They usually require an employer to pay 50 percent of the least expensive plan, or $100 per employee per month. For more information on this see our summary of the Rules for California Small Business Medical Insurance. You can also give us a call at BenefitsCafe.com 800-746-0045 and we can assist you with your group benefits when we are your broker.

HIPAA Nondiscrimination Requirements

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) mandates that an employer not discriminate because of pre-existing medical conditions. The U.S. Department of Labor (DOL) provides guidance for employers regarding different contribution amounts. The DOL describes HIPAA Nondiscrimination Requirements for group medical insurance and says that:

Distinctions among groups of similarly situated participants in a health plan must be based on bona-fide employment-based classifications consistent with the employer’s usual business practice. Distinctions cannot be based on any of the health factors noted earlier.

DOL also gives examples of “groups of similarly situated participants”.

For example, part-time and full-time employees, employees working in different geographic locations, and employees with different dates of hire or lengths of service can be treated as distinct groups of similarly situated individuals, with different eligibility provisions, different benefit restrictions, or different costs, provided the distinction is consistent with the employer’s usual business practice.

So, the objective classification can’t relate to a medical condition or to any protected class (e.g., race, religion, sexual orientation, gender, etc.) We have seen some employers define a class as executives vs. non-executives; front office vs. warehouse employees; salary vs. hourly employees, etc.

While the DOL’s HIPAA Nondiscrimination Requirements describes what is allowed by law, California medical insurance companies often only allow an employer to designate a single employer contribution amount on the master application for group medical insurance. The insurance companies are concerned that the employer contribute the minimum amount. In this case some employers identify the different classes of employees and contribution amounts in their employee handbook.

IRS Section 125 Nondiscrimination Rules

The Internal Revenue Service (IRS) allows employees to make pre-tax contributions to employer -sponsored medical, dental and vision plans. The employer must have Section 125 Premium Only Plan (POP). which includes a plan document and disclosures to employees. The IRS describes nondiscrimination guidelines in this document: IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits. In exchange for benefit of not paying taxes on employee contributions, the IRS requires employers to not favor “highly compensated” and “key employees.”

According to the IRS, highly compensated employee include:

  1. An officer of the company;
  2. A shareholder who owns more than 5% of the company;
  3. An employee who is highly compensated (generally $125,000 in compensation or more); or
  4. A spouse or dependent of an officer or 5% owner.

A key employee is:

  1. An officer having annual pay of more than $185,000.
  2. A 5% owner of the business.
  3. A 1% owner of the business whose annual pay is more than $150,000 in 2020.
  4. The spouse or dependent of any of the above.

The IRS applies complicated eligibility, contribution and benefit tests to employer-sponsored plans. Employers must do annual testing to confirm that they do not violate these rules. A Third Party Administrator (TPA) typically does the discrimination testing. When employers fail the discrimination test, they must remove the pre-tax contribution of a sufficient number of highly compensated and key employees until the they pass the test.

In 2007 the IRS offered some safe harbor guidance for Premium Only Plan (POP) Section 125 plans which apply until they approve final regulations.

Summary

So, while it is relatively easy to comply with the the HIPAA Nondiscrimination Requirements which allow employers to contribute different amounts towards different classes of employees; the IRS Section 125 Non Discrimination Rules are more difficult and limit an employer’s ability to contribute different amounts when the employee classes favor key and highly compensated employees.

Again, we are not lawyers and do not give legal advice. If you want to offer different contributions for different classes of employees you should consult your attorney. We can assist you as your agent/broker on your California group medical insurance plan. Please give us a call at 800-746-0045.