Can employers pay a different percentage of premiums to different classes of employees?

In a nutshell, you can “class” employees for benefits purposes. But, classing them as families vs singles is a slippery slope.

Plans may differ among employees only on “bona fide employment-based classifications” consistent with the employer’s usual business practice. 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 different groups of similarly situated individuals. It is perfectly permissible to offer three weeks of vacation to exempt employees and two weeks to nonexempt employees because the basis of the vacation benefit is their FLSA category and not any protected category or other applicable law.

The key is to make sure that benefits plan decisions are nondiscriminatory, keeping in mind the adverse impact on protected groups and any unintentional discrimination that may result from those decisions. The EEOC Compliance Manual of Employee Benefits, Section 3 provides this helpful guidance:

This Section addresses discrimination in life and health insurance benefits; long-term and short-term disability benefits; severance benefits; pension or other retirement benefits; and early retirement incentives. Under the ADEA, the ADA, and Title VII, charges involving these types of benefits may raise unique issues that require special analysis. This Section discusses that analysis in detail. At bottom, however, the fundamental principle of the anti-discrimination laws applies in this context as in all others: if an employer provides a lower level of benefits to an individual based on a prohibited factor, it must make out a defense. If it cannot do so, its conduct will be unlawful, and cause should be found.

In addition, the Health Insurance Portability and Accountability Act (HIPAA) makes it illegal to assess health insurance premiums based on health factors. It is not permissible to charge some employees more than any other similarly situated individuals based on medical conditions, claims experience, receipt of health care services, genetic information or disability. HIPAA does allow an employer to make distinctions in benefits that are offered and in the cost of benefits when those distinctions are not discriminatory.

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.

If you want to be more accurate with your process, you need to define all of the classes clearly. The better way to go is something like part-time /full-time or non-exempt /exempt. However you decide, make sure the lines are clearly defined and you will want to speak to your attorney, CPA, or plan administrator to be sure all applicable laws are followed.

2020