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Can an employer contribute different amounts toward employee medical insurance?

Small Business • October 5, 2023 at 7:52 AM • Written by: Holly Bengfort

One way small and midsized businesses can rein in their health insurance costs is by limiting who they offer a health benefit to, such as only offering the benefit to full-time employees.

Some employers may wonder whether they can take this approach a step further and offer different levels of benefits to different employees. Can an employer contribute different amounts toward different employees’ medical insurance?

The short answer is: Yes! As long as the employer doesn't make these decisions on a discriminatory basis, you can offer different benefits to different employees.

In this article, we'll explore how to offer different benefits to different types—or classes—of employees.

Looking for health benefits on a budget? Our guide has the tips you need

What are the laws surrounding benefit eligibility?

When it comes to the laws on making health benefits available to employees, the rules differ depending on how large 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 a health insurance plan to at least 95% of their full-time employees.

On the other hand, employers with fewer than 50 FTEs have no legal requirement to provide everyone with the same level of benefits or to provide benefits at all.

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 or offer different benefits to specific employees must base their decisions on bona fide employment-based classifications.

The IRS has established rules for employee classes—employers can't create their own. Employers must follow the IRS rules established in the New Health Coverage Options1 FAQ 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, you must treat all similarly situated employees equally. That means employees must receive the same level of benefits within each "class" the employer creates.

The key is ensuring these distinctions aren't discriminatory—we'll explore those rules in the next section.

These rules apply to all formal health benefits, such as group health insurance and health reimbursement arrangements (HRAs). Two types of HRAs, the individual coverage HRA (ICHRA) and the group coverage HRA (GCHRA), allow employers to customize allowances and eligibility using employee classes.

However, the rules are different for taxable employee stipends.

If you're offering your employees a stipend, the rules around employee classes are looser, as a stipend is an informal benefit. You can create any employee classes or combinations of classes you'd like. But you still have to abide by anti-discrimination rules, and you aren't allowed to create a class of employees that specifically excludes someone from receiving benefits.

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 individuals?

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).

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.


With a fully-insured plan, employers pay a traditional group health insurance company a 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 plans—including HRAs—are subject to the nondiscrimination rules under IRS Code §105(h)6. The law prohibits 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

Employers who want to provide different health benefits to different employees can do so worry-free through an HRA or employee stipend with PeopleKeep.

Our HRA and employee stipend administration software makes it easy for employers to design a compliant health benefit. Our award-winning customer support team can help answer any questions along the way.

With HRAs and health stipends, you can offer personalized benefits that allow you to reimburse your employees for their healthcare coverage. This includes monthly premium costs and out-of-pocket medical care 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.

Qualified small employer HRA (QSEHRA)

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

Individual coverage HRA (ICHRA)

The individual coverage HRA (ICHRA) is one of the most flexible health plans on the market, allowing employers to set different allowances and determine eligibility with employee classes.

With an ICHRA, you can use the following classes of employees:

  • Full-time employees
  • Part-time employees
  • Seasonal employees
  • Salaried employees
  • Non-salaried employees
  • Temporary employees of staffing firms
  • Employees covered under a collective bargaining agreement
  • Employees in a waiting period
  • Foreign employees who work abroad
  • Location, such as insurance rating areas, states, or multi-state regions

You can also combine any of the above employee classes. If you offer your ICHRA with PeopleKeep, you can segment your team into full-time, part-time, seasonal, salaried, non-salaried, or state-based classes. You can also use a combination of those classes.

Integrated 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 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.

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.

When using PeopleKeep’s WorkPerks platform to administer your stipend, you can set different allowances and determine eligibility for the following classes of employees:

  • Full-time employees
  • Part-time employees
  • Salaried
  • Hourly
  • Manager
  • Staff
  • Executive
  • In-state vs. out-of-state


Organizations can 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. By creating a transparent and well-structured employer contribution policy, employers can provide valuable benefits while effectively managing their budget.

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

Want help offering a compliant health benefit? PeopleKeep can help. Schedule a call now with a personalized benefits advisor!

This blog article was originally published on September 23, 2020. It was last updated on October 5, 2023.

  1. https://www.irs.gov/pub/irs-utl/health_reimbursement_arrangements_faqs.pdf
  2. https://www.govinfo.gov/content/pkg/FR-2019-06-20/pdf/2019-12571.pdf
  3. https://www.eeoc.gov/laws/guidance/section-3-employee-benefits#I.%20Introduction%20%28T7%29
  4. https://www.ncsl.org/research/labor-and-employment/discrimination-employment.aspx
  5. https://www.irs.gov/pub/irs-drop/n-11-01.pdf
  6. https://www.thehortongroup.com/resources/section-105h-nondiscrimination-rules#:~:text=Internal%20Revenue%20Code%20(Code)%20Section,respect%20to%20eligibility%20or%20benefits.

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Holly Bengfort

Holly is a content marketing specialist for PeopleKeep. Before joining the team in 2023, Holly worked in television news as a broadcast journalist. As an anchor and reporter, she communicated complex stories to the vast communities she served on a daily basis. Her background has given her a greater understanding of people and the issues that affect our lives. When Holly isn’t writing, she enjoys reading, exercising, and spending time at the beach.