Can an employer contribute different amounts toward health insurance?

One way small businesses can rein in their health insurance costs is by limiting who they offer a health benefit to, but employers can’t simply pick and choose who receives different benefits. To stay compliant in 2026, employers must follow federal rules to prevent discrimination.

In this article, we'll explain how you can offer different benefits to different employees using a group health plan and a health reimbursement arrangement (HRA).

In this blog post, you'll learn:

• How employee classes work.
• What nondiscrimination rules employers must follow.
• How HRAs help employers customize benefits.

What are the laws surrounding benefit eligibility?

First, let’s cover the basics regarding which organizations need to offer health benefits. When it comes to laws governing the availability of health benefits to employees, the rules vary by organization size.

Applicable large employers (ALEs) with 50 or more full-time equivalent employees (FTEs) must adhere to the Affordable Care Act's employer mandate. They must offer a health insurance plan to at least 95% of their full-time employees.

On the other hand, small employers with fewer than 50 FTEs have no legal requirement to provide health benefits at all.

How can employers restrict eligibility or offer different benefits to different employees?

If you're considering offering different benefits to different employees, you need to ensure you're doing so legally. Employers who want to restrict benefit eligibility or offer different benefits to specific employees must base their decisions on bona fide employment-based classifications.

The Internal Revenue Service (IRS) has established rules for employee classification. Employers can't create their own employee classes. Employers must follow the rules established in the New Health Coverage Options FAQ¹ or the Final ACA Rules².

The rules, in summary, state that the employer's distinctions must relate directly 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 non-salaried (such as hourly)
• An employee's job title
• An employee's seniority

Additionally, employers must treat similarly situated employees equally. Employees within the same class generally must receive benefits on the same terms. This applies to health insurance plans and integrated HRAs, also known as a group coverage HRA (GCHRA).

However, these employee classes differ if you’re offering an individual coverage HRA (ICHRA). ICHRA allowances can also still vary within a class based on age and family size under current federal rules. The key is ensuring these distinctions aren't discriminatory. We'll explore those rules in the next section.

What discriminatory practices do I need to avoid with benefit eligibility and benefit features?

Employers can restrict health benefits eligibility to certain employees and offer different levels of benefits to different employees. However, they can't make these decisions on a discriminatory basis.

The EEOC Compliance Manual of Employee Benefits³, 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 exactly are those “prohibited factors”?

Generally speaking, prohibited factors include any individual characteristics protected by federal law, including:

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

Some states⁴ have enacted laws prohibiting discrimination on grounds like sexual orientation, marital status, or weight. Employers should consult with an attorney for further information on protected classes within each state as they relate to health benefits decisions.

What about highly compensated employees?

While it's acceptable to offer different benefits to different employee classes, employers must also be careful about discriminating in favor of highly compensated individuals (HCIs), known as key employees.

An HCI is an employee who is at least one of the following:

• One of the five highest-paid officers
• A shareholder who owns more than 10% of the value of the organization's stock
• Among the highest-paid 25% of all employees

The rules surrounding HCIs differ based on whether you offer a fully-insured or self-insured plan.

Fully-insured

With a fully-insured plan, employers pay group insurance carriers a monthly health insurance premium. They can offer better benefits (or a lower cost) to HCIs as long as there's no cafeteria plan.

While the ACA added nondiscrimination rules for insured plans that are very close to those for self-insured plans, the IRS⁵ indefinitely delayed the enforcement of these nondiscrimination rules in 2011. If an organization offers a cafeteria plan, the plan becomes subject to the nondiscrimination rules for HCIs.

Self-insured

Self-insured plans, including HRAs, are subject to IRS⁶ Code §105(h) nondiscrimination rules. The law prohibits employers from offering HCIs better benefits or benefits at a lower cost than other employees.

How PeopleKeep by Remodel Health can help you offer a compliant health benefit

Small employers who want to offer different health benefits compliantly can do so through an HRA with PeopleKeep by Remodel Health.

Our benefits administration software makes it easy to:

• Create compliant employee classes for an ICHRA or GCHRA
• Manage employees’ reimbursements and required plan documents
• Stay aligned with IRS and ACA requirements
• Offer employees a flexible alternative to traditional group insurance

With HRAs, you can offer personalized benefits that allow you to reimburse your employees for their healthcare coverage. This includes monthly health insurance premiums and out-of-pocket medical expenses. This is an excellent alternative to group health insurance coverage if you want to avoid high costs or other challenges that come with a group policy.

We'll cover the specific guidelines for differing allowances with an HRA in the following sections.

Individual coverage HRA (ICHRA)

The individual coverage HRA (ICHRA) works for employers of all sizes. It allows you to customize allowances and eligibility based on 11 employee classes. You can also vary allowances based on age and family status. Plus, with no annual limits on employer contribution amounts, you can be as generous as you would like with your allowances.

The 11 employee classes are:

1. Full-time employees
2. Part-time employees
3. Seasonal employees
4. Salaried employees
5. Non-salaried employees
6. Temporary employees of staffing firms
7. Employees covered under a collective bargaining agreement
8. Employees in a waiting period
9. Foreign employees who work abroad
10. Location, such as insurance rating areas, states, or multi-state regions
11. A combination of two or more of the above

Here's an example of how you can vary allowances:

Employers can offer an ICHRA as a stand-alone HRA or alongside a group health plan. However, employers offering a group health plan to one employee class and an ICHRA to another may also need to satisfy minimum class size requirements under federal rules.

Qualified small employer HRA (QSEHRA)

The qualified small employer HRA (QSEHRA) is only for small employers with fewer than 50 FTEs. A QSEHRA allows you to keep things simple by offering a single benefit to all full-time Form W-2 employees.

Employers can specify whether they want to offer this benefit to only full-time employees or full- and part-time employees. You can also provide different allowances to employees based on family status, such as single, married, or employees with dependents.

However, you can't categorize employees into different classes by job title, salary or hourly, seniority, or whether the employee works in or out of state with a QSEHRA. You also can't differ eligibility beyond including or excluding part-time workers.

The QSEHRA has annual caps on employer contribution amounts.

Group coverage HRA

The GCHRA is for employers who offer employees a traditional group health plan and want to assist employees with out-of-pocket costs like deductibles, copays, and eligible over-the-counter expenses. Like with an ICHRA, you can customize eligibility and allowances by employee class. You can use any bona fide employee classification. However, if you offer a GCHRA with PeopleKeep, we’ve created seven distinct classes.

Employers can set different allowances and determine eligibility for the following classes of employees:

• Full-time employees
• Part-time employees
• Salaried employees
• Hourly employees
• Manager
• Executive
• Staff

Health stipend

A health stipend is a taxable benefit that provides more flexibility and customization than an HRA or group health insurance. This allows you to offer W-2 employees, 1099 contractors, and international workers benefits. It's also an excellent option for organizations with employees who receive advance premium tax credits (APTC).

Since health stipends are taxable, you must report any reimbursements as taxable wages on your employees' W-2s.

A stipend doesn't satisfy the ACA's employer mandate for organizations with 50 or more FTEs. Unlike an HRA, you can't ask for proof of insurance or receipts for items listed in IRS Publication 502.

If you don't need the extra flexibility, a tax-free HRA is often a better fit for most business owners and organizations that want to help employees with their medical care.

Conclusion

Organizations can legally offer different health benefits to different employees if they use IRS-approved employee classes and comply with federal nondiscrimination rules. Health reimbursement arrangements (HRAs), like the ICHRA and GCHRA, give employers a compliant way to customize contributions while controlling costs and supporting employees with personalized coverage.

Need help designing a compliant employee benefit strategy? PeopleKeep by Remodel Health can help you build and administer an HRA that fits your workforce and budget. Schedule a call today to get started!

This article provides general information, not legal advice. You should consult with a tax advisor or health insurance broker if you have further questions.

This blog article was originally published on September 23, 2020. It was last updated on May 27, 2026.

References

1. CMS: FAQs on New Health Coverage Options for Employers and Employees
2. Federal Register: Health Reimbursement Arrangements and Other Account-Based Group Health Plans
3. U.S. Equal Employment Opportunity Commission: Section 3 Employee Benefits
4. NCSL: State Public Accommodation Laws
5. IRS Notice 2011-1
6. Cornell Law School: 26 U.S. Code § 105