Employer Health Insurance Contributions: What is Actually Required
In a recent post, I outlined how employers can prioritize their employee benefits budget. Once an employer decides how much to contribute, the next question is:
Can the employer contribute different amounts for different employees?
The answer is sometimes, but the contribution strategy needs to be structured carefully.
There is no single federal law requiring every employee to receive the exact same dollar contribution toward health insurance. However, several laws, tax rules, carrier requirements and plan documents affect what an employer can do.
For most Iowa small employers, the best approach is to establish a clearly defined contribution formula and apply it consistently to employees within the same eligible class.
Start With a Consistent Formula
An employer might:
Pay 50% of each employee’s individual premium
Pay 100% of employee-only coverage
Contribute a fixed dollar amount each month
Pay different amounts for employee and dependent coverage
Establish different contributions for legitimate employee classes
A consistent formula does not always produce the same dollar contribution. If an employer pays 50% of each employee’s premium, the actual dollar amount may vary because individual premiums can differ.
Problems are more likely when an employer makes individual exceptions, such as paying 100% for one employee while paying 50% for a similarly situated employee without a documented reason.
HIPAA Prohibits Health-Based Differences
The Health Insurance Portability and Accountability Act, better known as HIPAA, prohibits group health plans from discriminating based on health factors such as:
Health status or medical conditions
Claims or medical history
Disability
Genetic information
Evidence of insurability
An employer cannot charge an employee more because that employee has a chronic condition, takes an expensive medication or has submitted significant claims.
HIPAA does allow employers to distinguish between employees using a bona fide employment-based classification that is consistent with their normal business practices.
For a small Iowa employer, that could mean:
Providing different contribution levels to hourly field employees and salaried office employees, provided those classifications already exist for legitimate business reasons
Using different contribution strategies for employees working in a Des Moines office and employees working in a Cedar Rapids location
A company should not create a new employee class simply to provide one favored employee with a better benefit. The classification should reflect how the business actually organizes its workforce and should not be based on employee health or anticipated claims.
The Department of Labor provides additional guidance on HIPAA nondiscrimination and similarly situated employees.
Section 125 Applies to Pre-Tax Payroll Deductions
When employees pay their portion of health insurance premiums through pre-tax payroll deductions, the employer generally needs a written Section 125 Premium Only Plan, commonly called a POP document.
Section 125 also prohibits cafeteria plans from discriminating in favor of highly compensated or key employees regarding eligibility, contributions or benefits.
This does not mean every employee must receive the exact same contribution. It does mean employers should be cautious about providing owners, officers or highly compensated employees with more favorable treatment.
You can review the requirements in Section 125 of the Internal Revenue Code.
Self-Funded Plans and HRAs Have Additional Rules
Self-funded medical reimbursement plans are subject to nondiscrimination requirements under Section 105(h) of the Internal Revenue Code. Certain Health Reimbursement Arrangements, or HRAs, may also be subject to these rules.
These arrangements generally cannot favor highly compensated employees regarding eligibility or benefits. If the rules are not followed, some benefits received by highly compensated employees may become taxable.
The IRS provides additional information in Publication 15-B.
Employment Discrimination Laws Still Apply
Health insurance is a form of employee compensation. Contribution decisions cannot be based on protected characteristics such as race, religion, sex, national origin, age, disability or genetic information.
The Equal Employment Opportunity Commission provides guidance on how federal employment discrimination laws apply to health insurance and other employee benefits.
Iowa Carrier Requirements Also Matter
Iowa small employers may work with carriers such as Wellmark Blue Cross and Blue Shield, UnitedHealthcare and several others. Each carrier can establish its own contribution and participation requirements.
A carrier might require the employer to contribute a minimum amount toward employee-only coverage or apply its contribution formula consistently across an eligible employee class.
These are generally carrier underwriting requirements rather than independent federal laws, but employers must still satisfy them to establish or maintain coverage. The rules may also vary by carrier, product and funding arrangement.
That is why the contribution strategy should be reviewed before the employer promises a specific amount to employees or enters deductions into payroll.
The Practical Takeaway
Employers generally have flexibility in how they allocate their benefits budget. What they should avoid is making informal, employee-by-employee decisions without considering the compliance implications.
Before implementing a contribution strategy:
Define which employees are eligible
Identify any legitimate employee classes
Choose a clear contribution formula
Confirm the carrier’s requirements
Coordinate the strategy with payroll
Put the appropriate Section 125 and ERISA documents in place
A well-documented contribution strategy helps an employer control costs, explain the program clearly and avoid preventable compliance issues.
Need Help Reviewing Your Contribution Strategy?
Business Tree Benefits helps Iowa businesses with 2–50 employees build benefits programs that fit their budgets while meeting carrier and compliance requirements.
If you are starting a group health plan, adding employees or reconsidering how much your business contributes, schedule a benefits review. We can review your employee classes, contribution formula, carrier requirements and supporting plan documents before the strategy is implemented.
This article is intended for general educational purposes and should not be considered legal or tax advice. Employers should consult the appropriate professional regarding their specific circumstances.
