What To Look For When Offering Multiple Group Health Plans

by Misty Baker
What To Look For When Offering Multiple Group Health Plans

A question business owners often have is whether they can exclude certain categories of employees from group health benefits or if they can offer different types of health benefits to different categories of employees.  As you can imagine, this can be a tricky question. There are several federal laws that must be reviewed to ensure you don’t run afoul of nondiscrimination rules. In addition to the federal laws, you also should review laws in your state to ensure additional rules do not apply.

This determination can be very complex. Therefore, it is recommended that you have the appropriateness of your plan reviewed by an attorney that specializes in benefits.

When determining the legality of the plan, you should include the following federal laws in your review:
 

Discrimination Enforced by the U.S. Equal Employment Opportunity Commission (EEOC)

The EEOC enforces federal laws that prohibit discrimination based upon: 

  • Race
  • Color
  • Religion
  • Sex
  • National Origin
  • Age
  • Disability or
  • Genetic Information

Companies cannot discriminate in offering benefits to employees based upon the factors above.
 

ERISA Non-Discrimination Requirements

The Employee Retirement Income Security Act (ERISA) generally allows employers to set eligibility for their group plans as long as they notify their employees of the rules and treat similarly situated classes of employees consistently.  However, they are not allowed to discriminate against certain classes of employees. For example, companies are not allowed to discriminate based upon health factors. 

Companies are able to provide different benefits to different classes of employees. ERISA states that distinctions in benefits can be made among “Bona-Fide Employment-Based Classifications”. So what is a bona-fide employment-based classification? It really depends on the facts for each company. The classifications need to be consistent with how the company typically operates its business. The classifications cannot be driven by eligibility for benefits.

According to the Department of Labor (DOL), examples of classifications that may be bona-fide include:

  • Different geographic locations
  • Full time versus part time status
  • Membership in a collective bargaining unit
  • Date of hire or length of service
  • Differing occupations
     

Internal Revenue Service

The Internal Revenue Service has two primary Sections that relate to nondiscrimination testing 

  • Section 125 – Cafeteria Plans
  • Section 105(h)  - Self-Insured Medical Reimbursement Plans

These sections focus on ensuring that benefit plans do not favor Highly Compensated Individuals (HCI). For purposes of determining a HCI, the criteria are as follows:

  • An Officer of the company
  • An employee who owned more than 5% of the company in either the plan year being tested or the preceding plan year.
  • An employee who earned more than $120,000 in 2016 will be deemed a HCI in 2017. 
  • A spouse or a dependent of someone meeting any of the three criteria above
     

Section 125 Cafeteria Plans

If a company utilizes a Section 125 plan to withhold employee premiums on a pre-tax basis, nondiscrimination testing can be quite complicated. Nondiscrimination testing primarily focuses on ensuring Highly Compensated Individuals (HCI) are not provided preferential treatment compared to non-HCIs. The primary three primary areas are tested under Section 125 include:

  • Benefits and Contributions – The group plan cannot provide more access or better benefits to HCIs than are available to non-HCIs
  • Eligibility – The plan must make sure that too many non-HCIs are excluded from participation to the plan
  • Utilization by Key Employees – The plan will be deemed discriminatory if HCIs elect more benefits under the plan.

If a company sets up their plan design in a nondiscriminatory manner, the company should be able to pass the first two tests each year. The Utilization testes are based on the actual benefits that are elected each year. Therefore, it is important the calculation is made each year.

The testing for compliance for the above areas can be quite complicated. While there are three primary areas, there may be multiple calculations to determine compliance with each area. Therefore, it is recommended that you work with either an attorney that specializes in benefits or an expert in the field to determine compliance with the requirements.
 

Section 105(h) Self-Insured Medical Reimbursement Plans

A self-insured medical reimbursement plan is a separate written plan for the benefit of employees which provides for reimbursement of employee medical expenses. A plan is self-insured unless reimbursement is provided under an individual or group policy of accident or health insurance issued by a licensed insurance company. 

For the amounts received by the employee through the self-insured medical reimbursement plan to be excluded from the employee’s gross income, the plan must satisfy the requirements of Section 105(h).  The primary goal of Section 105(h) is to ensure the plan does not discriminate against in favor of HCIs. The two tests to ensure the plan is compliant are related to:

  • Eligibility: The plan must meet the Percentage Test and the Classification Test. These tests ensure that a sufficient number of non-HCIs have access to the benefits and that any classifications that have a bearing on who is eligible do not discriminate in favor of HCIs. 
  • Benefits: The plan must ensure that all benefits provided for participants who are HCIs are provided for all other participants.

As noted above, the calculations to determine compliance with these requirements can be quite complicated. Therefore, we would suggest that you utilize a benefits attorney or an expert in the field to ensure your plans are compliant. 
 

Chris Cooley is co-founder of MyHRConcierge and SMB Benefits Advisors. Clients rely on Chris for HR compliance and administration; workforce management and benefits advisory solutions. SMB Benefits Advisors and MyHRConcierge specialize in helping small to medium businesses throughout the U.S. Contact Chris directly at ccooley@myhrclientrep.com or 855-538-6947 Ext 108.


 

Get More from Healthcare Exchange

Subscribe today to stay up-to-date on the latest healthcare reform news, tools and resources.