Understanding the Landscape: Classing Employees
While there was always some discouragement towards employers paying more of the cost of medical coverage for some employees and less for others in self-funded plans, the ACA put teeth into the regulations with a strong prohibition when paying more for higher paid employees versus lower paid employees. Having different tiers or classes also increases the administrative burden on the employer.
However, there is some leeway based on certain criteria:
- Different companies under a holding company hiring different types of employees (e.g., if you own an engineering firm and a restaurant)*
- Hourly versus salary
- Geographic location*
- Permanent full-time employees versus variable hour employees or part-time employees*
- Seasonal employees
- Tenure or length of service at the company*
- Within the same company, white collar versus blue collar
- Union versus non-union*
- Owners versus regular employees, depending on the company type and taxation (e.g. physician-owned practices or a law firm)
*bona fide classifications
In general, employers may treat employees differently, as long as they aren’t violating any federal rules. The discrimination rules currently apply to self-insured health plans (MEWAs and level-funded plans are in this bucket) and when employees pay their health insurance premiums on a pre-tax basis.
If an employer chooses to use classes, they should be prepared to make a business case for why their approach is appropriate under the circumstances. An example of a good business case: “We experience the most turnover within the first 90 days of employment for hourly staff, so we use a 90-day waiting period for those workers to minimize administration and re-work while using a 30-day waiting period for the office staff.”
Potential Pitfalls
These types of plan designs may be considered discriminatory:
- Different benefits offered to a select group of employees (e.g., very low deductible plan offered only to executives or owners);
- Only a select group is eligible to participate (only offered to management or office staff);
- The employer pays more or all of the cost of coverage for a select group of employees (paying 100 percent of managers, but not other employees); or
- Excluding based on health status or age (e.g., requiring, pressuring, or paying for employees to move to Medicare when they become eligible).
Ground Rules
To ensure your group can pass any applicable nondiscrimination test, the best course of action is for the employer to treat all employees the same for the purposes of health plan coverage in terms of cost, eligibility rules, and types of coverage offered.
Applicable large employers (50 or more full-time equivalent employees) also have the opportunity to implement a measurement period if they have variable hour or seasonal employees to measure those employees consistently working full-time hours. Please understand that different federal rules use different counting methods to determine what is considered “seasonal” or “variable hour.”
Tread Lightly
Although fully insured plans are not subject to nondiscrimination testing, the ACA includes a requirement that non-grandfathered, fully insured health plans follow many of the same nondiscrimination rules that have historically applied only to self-insured plans under IRS Code Section 105(h). These rules have been delayed since September 2010, pending regulations from the IRS.
However, if the fully insured plan is paid for with pre-tax dollars by the employee, highly compensated employees’ health plan contributions become taxable if the plan is considered to be discriminatory.
Ground Test
It’s important to review your employee medical contributions periodically, such as at renewal time, if you’re giving an advantage to highly compensated employees over other employees on medical premiums. Your ARC client advisor can provide reference material to help you to determine if your plan meets the criteria to avoid issues as well as strategies to walk back if you find that your plan needs adjusting.
If you’d like to learn more about discrimination testing or the concepts introduced here, we have a guide available upon request. Please contact your ARC representative for more information.