Can you offer health insurance to certain employees only?

Written by: Josh Miner
September 23, 2020 at 8:05 AM

One way small employers rein in health insurance costs is to only offer the benefit to full-time employees. Many employers have asked us whether they can take this approach a step further, and offer different levels of benefits to different employees.

The short answer is yes, as long as the employer does not make these decisions on a discriminatory basis.

In this post, we’ll explore what the law requires, how employers can legally restrict eligibility or offer different benefits to different employees, and some suggested options.

Benefit eligibility rules in current law

Applicable Large Employers (ALEs) are employers with 50 or more full-time equivalent employees. These employers are subject to the Affordable Care Act’s employer mandate and must offer insurance to all full-time employees. Employers with fewer than 50 full-time equivalent employees are exempt from the mandate and don’t have to provide the same level of benefits to everyone. Read this article for more information about the mandate and how to calculate the number of full-time equivalent employees.

Bona fide employment classifications are key

Employers that want to restrict benefit eligibility to certain employees, or to offer different benefits to different employees, must base their decisions on bona fide employment-based classifications. The distinctions the employer makes must relate directly back to the employee’s status with the company. For example, the employer could restrict eligibility or offer different levels of benefits based on:

  • Full-time or part-time status
  • Whether an employee works in or out of state
  • Whether an employee is salaried or hourly
  • An employee's job title
  • An employee's seniority

The key is to make sure these distinctions aren't discriminatory.

Additionally, all similarly situated employees must be treated equally. That means that within each "class" the employer created, employees must receive the same level of benefits.

Avoid discriminatory practices with benefit eligibility and benefit features

As noted in the previous section, employers can restrict health benefits eligibility to certain employees as well as offer different levels of benefits to different employees. However, they cannot make these decisions on a discriminatory basis.

The EEOC Compliance Manual of Employee Benefits, Section 3 says:

“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.”

So what are those prohibited factors?

Generally, they’re any individual characteristics protected by federal law. These include:

  • Race
  • Color
  • National origin
  • Sex (including pregnancy, childbirth, and related medical conditions)
  • Religion
  • Disability
  • Genetic information
  • Citizenship status
  • Age

Some states have enacted laws that go further, prohibiting discrimination on grounds like sexual orientation, marital status, or weight.

These states and their additional protected characteristics include:

  • Alaska: Marital status, mental illness, HIV/AIDS
  • Arizona: HIV/AIDS
  • California: Ancestry; marital status; sexual orientation; gender identity and gender expression; HIV/AIDS; medical condition; political activities or affiliations; military or veteran status; status as a victim of domestic violence, assault, or stalking
  • Colorado: Ancestry, sexual orientation, HIV/AIDS, lawful conduct outside of work, mental illness, military status, transgender status, marital status or civil union partnership with a coworker
  • Connecticut: Marital status, sexual orientation, HIV/AIDS, gender identity or expression
  • Delaware: Marital status, sexual orientation, gender identity
  • District of Columbia: Marital status; sexual orientation; enrollment in vocational, professional, or college education; family duties; source of income; place of residence or business; personal appearance; political affiliation; victim of intrafamily offense; tobacco use; gender identity or expression; status as unemployed; any reason other than individual merit
  • Florida: Marital status, HIV/AIDS, sickle cell trait
  • Hawaii: Sexual orientation, gender identity or expression, marital status, HIV/AIDS, arrest and court record, credit history or credit report, status as a victim of domestic or sexual violence
  • Illinois: Marital status, sexual orientation, military and veteran status, unfavorable military discharge, gender identity, arrest record, victims of domestic violence, status as being under an order of protection, lack of a permanent mailing address
  • Indiana: Ancestry, off-duty tobacco use, sealed or expunged arrest or conviction record
  • Iowa: Sexual orientation, HIV/AIDS, gender identity, wage discrimination
  • Kansas: HIV/AIDS, military service or status
  • Kentucky: HIV/AIDS, smoker or nonsmoker, off-duty tobacco use, occupational pneumoconiosis with no respiratory impairment resulting from exposure to coal dust
  • Louisiana: Citizenship status, sickle cell trait
  • Maine: Sexual orientation, gender identity or expression, past workers’ compensation claim, past whistle-blowing, medical support notice for child
  • Maryland: Marital status, sexual orientation
  • Massachusetts: Marital status, sexual orientation, military service, arrest record, gender identity
  • Michigan: Marital status, HIV/AIDS, height or weight, misdemeanor arrest record
  • Minnesota: Marital status, sexual orientation, gender identity, member of local commission, receiving public assistance
  • Mississippi: Military status
  • Missouri: HIV/AIDS, off-duty tobacco use
  • Montana: Marital status
  • Nebraska: Marital status, HIV/AIDS
  • Nevada: Sexual orientation, lawful use of any product when not at work, use of service animal, gender identity or expression, credit report or credit information, opposing unlawful employment practices
  • New Hampshire: Marital status, sexual orientation
  • New Jersey: Marital status, sexual orientation, HIV/AIDS, atypical hereditary cellular or blood trait, military service, accompanied by service or guide dog, gender identity, unemployed status
  • New Mexico: Marital status, sexual orientation, gender identity, serious medical condition, domestic abuse leave
  • New York: Marital status, familial status, sexual orientation, gender identity, lawful use of any product or lawful recreational activities when not at work, military status or service, observance of Sabbath, political activities, use of service dog, prior arrests or criminal accusation, prior convictions, domestic violence victim status
  • North Carolina: HIV/AIDS, lawful use of lawful product when not at work, military status or service, sickle cell or hemoglobin C trait
  • North Dakota: Marital status, lawful conduct outside of work, receiving public assistance, keeping and bearing arms, status as a volunteer emergency responder
  • Ohio: Ancestry, military status, caring for a family member injured while in the armed service
  • Oklahoma: Military service, being a smoker or nonsmoker, using tobacco off duty
  • Oregon: Marital status, sexual orientation, parent with court-imposed medical support order, domestic violence victim status, refusal to attend an employer-sponsored meeting with the primary purpose of communicating the employee’s opinion on religious or political matters
  • Pennsylvania: GED rather than high school diploma, use of service animal, relationship or association with disabled person
  • Rhode Island: Sexual orientation, HIV/AIDS, domestic abuse victim, gender identity or expression, homelessness
  • South Dakota: Preexisting injury
  • Tennessee: Use of guide dog
  • Utah: HIV/AIDS
  • Vermont: Sexual orientation, HIV/AIDS, place of birth, gender identity, credit report or credit history
  • Virginia: Marital status
  • Washington: Marital status, sexual orientation, HIV/AIDS, hepatitis C infection, member of state militia, use of service animal, gender identity, domestic violence victim status
  • West Virginia: Off-duty tobacco use
  • Wisconsin: Marital status, sexual orientation, arrest or conviction record, military service, off-duty use of lawful product
  • Wyoming: Military service or status, off-duty tobacco use

Employers should consult with an attorney for further information on protected classes within each state as they relate to health benefits decisions.

Nondiscrimination and highly compensated individuals

While it is acceptable to offer different benefits to different employee classes, employers need to be careful about discriminating in favor of highly-compensated individuals (HCIs).

See this blog post for definitions of self-insured and fully-insured.

Self-insured plans are subject to the nondiscrimination rules under IRS Code §105(h). These prohibit employers from offering highly-compensated individuals (HCIs) better benefits or benefits at a lower cost than other employees. An HCI is an employee who is:

  • One of the five highest-paid officers;
  • A shareholder who owns more than 10 percent in value of the employer’s stock; or
  • Among the highest-paid 25 percent of all employees.

Fully insured plans, where employers pay a traditional group health insurance company a premium, can offer better benefits (or lower cost) to highly compensated employees, if there is no cafeteria plan. While the ACA added nondiscrimination rules for insured plans that are very close to those for self-insured plans, the IRS indefinitely delayed the enforcement of these nondiscrimination rules (IRS Notice 2011-1), and it is quite possible they will never become effective. If the company does offer a cafeteria plan, the plan becomes subject to the nondiscrimination rules for HCIs.

This article offers detailed information on nondiscrimination and HCIs.

Where PeopleKeep HRAs fit

Employers who want to offer health benefits through a health reimbursement arrangement (HRA) can do so with PeopleKeep worry-free. Our software makes it easy for employers to design a compliant health benefit, and our Personalized Benefit Advisors can help answer any question along the way. Some general guidelines for our HRAs are:

  • QSEHRA (qualified small employer HRA). The QSEHRA is best for employers too small to be subject to the ACA employer mandate who want to keep things simple and offer a single benefit to all W-2 employees. Employers can specify whether they want to offer this benefit to just full-time employees, or to full- and part-time employees.
  • ICHRA (individual coverage HRA). The ICHRA is one of the most flexible plans on the market, allowing employers to set different allowances and determine eligiibilty for the following classes of employees:
    • Full-time
    • Part-time
    • Seasonal
    • Salaried
    • Non-salaried
    • Location (state)
  • GCHRA (group coverage HRA). The GCHRA is best for employers who offer employees a traditional group health plan and want to assist employees with expenses like deductibles, copays, and eligible over-the-counter expenses.

See this article for a detailed discussion on the classes.

Still wondering which HRA is right for you?

Take the HRA Quiz


Organizations can absolutely offer different benefits to different employees, as long as they use job-based classifications to ensure they don’t discriminate.

Topics: Health Reimbursement Arrangement, Small Business, Qualified Small Employer HRA, Individual Coverage HRA

Additional Resources

New to HRAs? Learn which is best for you in our comparison chart.
Have questions about reimbursing your employees' health costs? Get answers.