By: HUB’s EB Compliance Team

As part of their benefits strategies, employers sometimes consider utilizing different benefits across different employee populations. In this case, “different” could refer to plan options, eligibility, rates, or any combination thereof. Regardless of the specific differences, the rules around this are complex and nuanced. This is a high-level overview of the rules and their application, but, this article is not intended to be a deep dive into the detailed mechanics of each rule.

Strategy Considerations

Employers often consider this type of strategy to meet a specific need they believe can be addressed through benefits differences. Some employers have difficulty attracting and retaining talent for certain positions and believe offering different benefits may attract these types of candidates. Other employers believe the spoils of being an executive, manager or even a salaried employee should include different benefits. Having employees in more than one geographic area may also be the driver for benefits differences. Finally, corporate transactions such as mergers and acquisitions may also lead employers to consider this strategy.

HIPAA

The Health Insurance Portability and Accountability Act (“HIPAA”) nondiscrimination rules prohibit employers from determining both benefits eligibility and premiums on the basis of health factors. For these purposes, health factors include health status, claims experience, medical history, genetic information and disability.

Examples included under eligibility include the effective dates of coverage, waiting periods, eligibility for specific benefits packages, and cost sharing (including copays, coinsurance, deductibles and out of pocket maximums). Premiums means not only the full premium amounts charged by carriers, not also the contributions towards those premiums by employers. Essentially individuals cannot be required to pay more for coverage based on health factors.

These rules apply on the basis of groups of similarly situated individuals, which means they allow for flexibility when employees who are not similarly situated are involved. Under the applicable regulations, groups of participants within the same bona fide employment-based classification are considered to be similarly situated. Examples of bona fide employment-based classifications include full-time/part-time, date of hire, occupation, and geographic location.

Cafeteria Plan/Self-Funded Plan Nondiscrimination Rules

The cafeteria plan rules under Section 125 of the Internal Revenue Code (the “Code”) must also be considered when offering different benefits to classes of employees. These rules govern benefits which employees pay for on a pre-tax basis and are designed to prevent employers from favoring highly compensated employees. If offering different benefits results in favoring the highly compensated employees, it will conflict with the Section 125 rules.

These rules require that classifications be both reasonable and nondiscriminatory as they relate to plan eligibility. A classification is only reasonable if it is reasonable based on all the facts and circumstances, and is established under objective business criteria. Objective business criteria include hourly/salary, full-time/part-time, job type and geographic location.

Just because a classification may be reasonable, does not mean it is necessarily nondiscriminatory. Nondiscriminatory classifications are established based on specific testing involving comparing the groups of eligible employees to determine if they favor highly compensated employees. The nuances of this test are beyond the scope of this article.

Another potential hurdle under the Section 125 rules relates to the contributions and benefits tests. While the eligibility tests must be satisfied to determine if the classifications themselves are allowed, the contribution and benefits tests require looking at the actual contributions and benefits received under the plan and comparing these across the highly compensated and non-highly compensated employees.

In addition to satisfying the Section 125 rules, self-insured plans must also satisfy the Section 105 nondiscrimination rules. These rules only apply to self-insured plans, but they are in addition to the Section 125 rules which apply to all pre-tax benefits. While similar, the specific eligibility and benefits tests under Section 105 are different than those under Section 105.

Separate Entities

Occasionally employers may have more than one business entity under their umbrella. These entities could be related to one another, such as two restaurants; or they could be very different, such as a manufacturing company and a restaurant. When these entities share common ownership meeting IRS requirements, they may be considered a single entity for purposes of these nondiscrimination rules. This means these rules apply across entities, and simply differing benefits by entity does not guarantee compliance.

As with the other rules covered here, these are nuanced and there are exceptions. Often times, entities may share certain amounts of common ownership, but not be looked at as a single entity. Employers are urged to consult with their own counsel or CPA to determine if they are considered a controlled group, and whether any exceptions for being a Separate Line of Business (SLOB) could apply.

ICHRAs

In some cases, an employer may want to offer an Individual Coverage Health Reimbursement Arrangement (ICHRA). For example, if the employer has an HMO for most of its employees, but has an isolated employee (due to a remote work arrangement, for example) that resides in a state outside its primary geography, an ICHRA may be a viable option. There are also times where an employer may want to offer an ICHRA to one class of employees and a major medical plan to other classes of employees. While this may be permissible, the ICHRA rules impose specific requirements, such as dividing the employee population based only on certain permitted classes of employees and minimum class size rules.

Next Steps

While offering different benefits to different classes of employees may be possible depending on the facts and circumstances of each situation, there are multiple rules to consider. Employers are urged to understand the following.

  • Both health factors and compensation often determine whether such classifications will run afoul of the rules.
  • The applicable rules have multiple prongs and tests, all of which must be satisfied to be compliant, and may use different definitions for similar terms (e.g., “highly compensated”).
  • The exact rules that apply will vary based on plan type, plan funding and whether the plan is paid for on a pre-tax basis.
  • Working with counsel or their CPA is recommended to determine whether employers with multiple business entities share the requisite common ownership to be considered a single entity.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory. 

NOTICE OF DISCLAIMER 

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.