Charging Employees Different Premiums

 December 8 2017     Diane Cross

When setting premiums for employees, employers generally have a great deal of flexibility with this portion of plan design.  That said, some employers consider charging employees different premiums and when doing so, questions inevitably come up on whether or not employers can do this.  As with most aspects of administering employee benefits, there are important considerations that will influence employer action.  Notably, different nondiscrimination rules under HIPAA, IRC Section 125 (for cafeteria plans), and IRC Section 105(h) (for self-funded plans) impact if an employer should charge employees different premiums, discussed below. 

Under HIPAA nondiscrimination rules employers are able to distinguish among employee populations regarding access to and the level of benefits offered, but must do so as a “bona fide employment-based classification” consistent with the employer’s business practice.  This includes classifications such as salaried, hourly, full-time, part-time, type of job, geographic location, and date of hire.  

If the above HIPAA requirements are met, employers should then consider the nondiscrimination requirements under IRC Section 125 and Section 105(h) which generally allow employers to treat employees differently as long as they are not discriminating in favor of highly compensated employees.  Although fully-insured plans are not subject to Section 105(h) nondiscrimination rules (delayed indefinitely), Section 125 nondiscrimination rules will apply if the health plan is offered through a cafeteria plan.

Section 125 – Cafeteria Plans

Benefit plans under Section 125 cannot discriminate in favor of highly compensated individuals (defined as officers, five percent shareholders, highly compensated employees, and spouses or dependents of the same) or key employees (participants who at any time during the plan year are officers with annual compensation greater than an indexed amount ($150,000 for 2017), five percent owners of the employer, or one percent owners having compensation in excess of $150,000). 

Section 105(h) – Self-funded Plans

Similarly, plans cannot discriminate in favor of highly compensated individuals (defined as one of the five highest-paid officers, shareholder who owns more than 10 percent of the value of stock of the employer’s stock, or among the highest-paid 25 percent of all employees – other than excludable employees who are not participants) under Section 105(h) with respect to eligibility or benefits. 

Charging employees different premiums may make it more difficult for the group health plan to pass applicable nondiscrimination tests under Sections 125 and 105(h). Before implementing such plan design, employers should test to confirm that doing so will not discriminate in favor of highly compensated individuals.  If it does, employers should re-evaluate their strategy.  Violating HIPAA nondiscrimination rules come with a high price tag, including an excise tax penalty of $100 per day per affected plan participant, while failing nondiscrimination testing under Section 125 and 105(h) causes highly compensated individuals to lose their tax advantage status and certain benefits will be taxable.  Please contact your HORAN representative with questions.