One way small and mid-sized businesses can rein in their health insurance costs is by limiting who they offer the benefit to, such as only offering 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 doesn’t make these decisions on a discriminatory basis, offering different benefits to different employees is completely legal.
In this post, we’ll explore:
- The laws surrounding benefit eligibility based on company size
- How employers can legally restrict eligibility or offer different benefits to different employees, based on class rules
- Discriminatory practices to avoid with benefit eligibility and benefit features
- Laws surrounding highly-compensated employees
- How PeopleKeep can help you offer a compliant health benefit
What are the laws surrounding benefit eligibility?
When it comes to the laws on eligibility for health benefits, the rules are a little different depending on how big your organization is.
For example, applicable large employers (ALEs), or employers with 50 or more full-time equivalent employees (FTEs), are subject to the Affordable Care Act’s employer mandate and must offer insurance to all full-time employees.
On the other hand, employers with fewer than 50 FTEs are exempt from the mandate and don’t have to provide the same level of benefits to everyone.
How can employers legally restrict eligibility or offer different benefits to different employees?
If you’re considering offering different benefits to different employees, you need to make sure you’re doing it legally. Employers that want to restrict benefit eligibility to certain employees, or offer different benefits to different employees, must base their decisions on bona fide employment-based classifications.
The IRS has established rules for employee classes—employers can’t make up their own. Employers must follow the IRS rules established in the New Health Coverage Options for Employers and Employees or the Final ACA Rules.
To summarize these rules, 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
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.
The key is to make sure these distinctions aren't discriminatory—we’ll explore those 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 as well as 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 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 exactly are those “prohibited factors”?
Generally speaking, prohibited factors include any individual characteristics protected by federal law, including:
- 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. 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 individuals?
While it is acceptable to offer different benefits to different employee classes, employers also need to be careful about discriminating in favor of highly-compensated individuals (HCIs).
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 percent in value of the employer’s stock
- Among the highest-paid 25 percent of all employees
The rules surrounding HCIs are a little different based on whether you’re offering a fully-insured or self-insured plan.
With a fully-insured plan, employers pay a traditional group health insurance company a premium, and can offer better benefits (or a lower cost) to HCIs, so long as 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, and it is quite possible they will never become effective. If the organization does offer a cafeteria plan, the plan becomes subject to the nondiscrimination rules for HCIs.
Self-insured plans are subject to the nondiscrimination rules under IRS Code §105(h). These prohibit employers from offering HCIs better benefits or benefits at a lower cost than other employees.
How PeopleKeep can help you offer a compliant health benefit
Our HRA administration software makes it easy for employers to design a compliant health benefit, and our award-winning customer support team can help answer any question along the way.
Some general guidelines for our HRAs are:
Qualified small employer HRA
The qualified small employer HRA (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. Different allowances can also be offered to employees by family status, such as single or married, or employees who have dependents.
Individual coverage HRA
The individual coverage HRA (ICHRA) is one of the most flexible plans on the market, allowing employers to set different allowances and determine eligibility for the following classes of employees:
- Location (state)
Group coverage HRA
The group coverage HRA (GCHRA), often called an integrated HRA, is 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.
Employers can set different allowances and determine eligibility for the following classes of employees:
- Full-time employees
- Part-time employees
Organizations can absolutely offer different benefits to different employees, as long as they use job-based classifications to ensure they don’t discriminate and are following the IRS established rules on employee classes. Want help offering a compliant health benefit? PeopleKeep is here to help!