|Guest blog content provided to Q4iNetwork Consultants by the National Association of Health Underwriters (NAHU)|
One of the recurring questions posed by NAHU members asks whether employers can vary the employer contribution to health coverage by employee class. For example, an employer may want to pay 75% of coverage for hourly workers and 50% for salaried workers. Or, an employer may want to offer 100% of coverage for workers who were with the company prior to January 1, 2017 but only 75% for those hired on or after January 1, 2017.
The short answer is “yes.”
Employers have had a long history of varying contributions based on classes of employees.
The complication enters if the employer allows for pre-tax deductions of the employee portion of the premium. Cafeteria plans are subject to the Section 125 nondiscrimination rules, but there is a safe harbor exception available for premium only plans, commonly called POP plans. The safe harbor is available for POP plans if the employer allows all employees to elect the same salary reduction. These rules by the IRS indicate the following:
(f) Safe harbor test for premium-only-plans—(1) In general. A premium-only-plan (as defined in paragraph (a)(13) of this section) is deemed to satisfy the nondiscrimination rules in section 125(c) and this section for a plan year if, for that plan year, the plan satisfies the safe harbor percentage test for eligibility.
What this safe harbor means is that a plan is deemed to satisfy the Section 125 nondiscrimination rules because all employees can participate and can elect the same salary reductions for the same benefits. There is no need to test utilization.
Here is an example from the IRS rules:
(2) Example. The following example illustrates the rules in paragraph (f) of this section:
Example. Premium-only-plan. (i) Employer F’s cafeteria plan is a premium-only-plan (as defined in paragraph (a)(13) of this section). The written cafeteria plan offers one employer-provided accident and health plan and offers all employees the election to salary reduce same amount or same percentage of the premium for self-only or family coverage. All key employees and all highly compensated employees elect salary reduction for the accident and health plan, but only 20 percent of nonhighly compensated employees elect the accident and health plan.
(ii) The premium-only-plan satisfies the nondiscrimination rules in section 125(b) and (c) and this section.
Keep in mind that this POP plan safe harbor is not available if the employer is offering other benefits beside just facilitating the payment of premiums. If the employer is offering a health FSA, the POP safe harbor would not be applicable. Full Section 125 testing would be required.
The long answer, therefore, is that an employer wanting to create separate classes and vary contributions, eligibility or benefits will not be able to use this POP safe harbor. Full Section 125 testing will be required. A vendor or legal counsel can help the employer determine if the plan will be able to vary contributions, eligibility or benefits and still pass the Section 125 nondiscrimination testing.
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