Offering group health insurance is prohibitively expensive for most small businesses. To cut costs, many purchase high-deductible health policies, exclude part-time employees from eligibility, and require employees to pay a significant share of the premium.
Some small businesses want to go further, though. Two particularly prominent cost-cutting strategies are offering health insurance only to some full-time employees, or offering different levels of benefits to different employees.
But are these strategies legal? With health care policy changing almost annually, it’s hard to be sure.
In general, the answer is yes, but businesses cannot make these decisions on a discriminatory basis.
In this post, we’ll explore what the law requires, how businesses can legally restrict eligibility or offer different benefits to different employees, and whether these are good strategies to save on benefits costs.
Benefit eligibility rules in current law
There are no small business health insurance requirements forcing businesses to provide health benefits to all full-time employees, or to provide the same level of benefits to everyone.
Although language in the Affordable Care Act aims to prevents businesses from offering highly compensated employees more generous premium subsidy levels, this provision hasn’t taken effect and isn’t enforced.
As such, businesses have a lot of freedom in how they structure their benefits. Their only legal requirements are to make these decisions based on “bona fide employment-based classifications”—not arbitrary or discriminatory criteria—and to treat everyone in each class equally.
For example, you could choose to provide health benefits only to full-time employees but you couldn't choose to only men or only workers without disabilities.
How your business can offer different benefits to different employees
Businesses 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. That means the distinctions the business makes must relate directly back to the employee’s status with the company.
For example, the business 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 titles
- 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 business created, employees must receive the same level of benefits.
Avoiding discriminatory practices with benefit eligibility and benefit features
Businesses 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:
- National origin
- Sex (including pregnancy, childbirth, and related medical conditions)
- Genetic information
- Citizenship status
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
Businesses should consult with an attorney for further information on protected classes within each state as they relate to health benefits decisions.
Is offering benefits to certain employees only a good idea?
Restricting benefits eligibility or offering different benefits to different employees is one way to cut benefits costs. It may not be the best option, though.
Small businesses offer health benefits to hire and keep valuable employees. With every restriction, the business chips away at its ability to reach that goal.
If price is the primary reason for restricting benefits eligibility or offering different benefits to different employees, the business should investigate personalized health benefits options like the qualified small employer health reimbursement arrangement (QSEHRA).
With the QSEHRA, small businesses can set their own benefits budget while offering valuable benefits to all employees.
Small businesses may also be interested in the upcoming individual coverage HRA (ICHRA), which will be available in January 2020. With the ICHRA, businesses can set eligibility requirements and benefit level according to nine different employee classes.
With some exceptions for discriminatory practices, small businesses are free to offer health insurance to certain employees only. They’re also free to offer different benefits to different employees.
Small businesses risk losing valuable employees this way, however. If cost-cutting is the primary goal, these businesses would be better off offering a personalized health benefit like the QSEHRA.