Breaking Up a Group Plan

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An employer of mine heard the following presentation from a decent sized agency operating in multiple states. They currently have a group medical plan, here are the details:

1. They have a system where the employer contributes after tax compensation to the employee to purchase medical coverage. They will contribution $X per age band. I didn't think the employer could base contributions in this manner? Maybe if it's not run through pre-tax like the old Sect. 125 plans there aren't any discrimination rules?

2. The condition for the compensation is based on continued individual medical coverage. If the employee drops the coverage, the agency/TPA will alert to employer to cancel the coverage.

3. The agency/TPA collects money from the employer and employee via payroll deduction and pays the indiviudal plan directly on behalf of the employee.

Is this legit? This seems to go against everything I knew, but maybe what I knew changed. I didn't think employer contribution could be tied to the purchase of an individual policy. I also didn't think the compensation could be tied to age bands as that would be discriminatory.
 
Your instincts are correct. They cannot require the employee to purchase health insurance (or anything else) with the money. It is simply a raise, which is taxable and is fully owned by the Employee.
 
Your instincts are correct. They cannot require the employee to purchase health insurance (or anything else) with the money. It is simply a raise, which is taxable and is fully owned by the Employee.

Thanks for the replies so far. As far as the compensation end of it, what is allowed:

1. Full discretion to compensate or not compensate each employee in the dollar amount they choose. Whether that is based off of a general premium number percentage or age group? If it's after tax compensation, do the class rules matter?

2. Compensate each employee in a specific class using a formula such as % of pay or a flat dollar amount?

The first option allows more flexibility. I was told pre-2014 when we would set up employee bonuses and pre - tax through a Section 125 plan, it had to be based on #2. Is that no longer correct? Finding an answer has been difficult. Thank you!
 
It is my understanding that the "raise" cannot be based on the health insurance premium at all, or you have essentially turned the IFP plans into group plans, and then you have problems with ERISA, ACA, and discrimination.

The easiest method is just to go back to standard HR "same pay for same work" rules and give similar raises to all similarly situated employees. So, the "% of pay" in your option #2 works, and a flat bonus to everyone works. Personally, I would move away from the age-group option (it opens a couple of cans of worms) and I would recommend not basing it on the actual premium either.

Remember that this option requires the employer to similarly compensate all employees, even the ones that previously waived their rights to the company's group health plan.

Then the employer must detach himself from the decisions each employee makes about how to use that "raise".

Now, having said that...... Many small business run things by the seat of their pants, and don't always follow those non-discrimination values written above! Even if they don't, I would still steer away from basing the "raise" on the premium or the person's age.
 
It is my understanding that the "raise" cannot be based on the health insurance premium at all, or you have essentially turned the IFP plans into group plans, and then you have problems with ERISA, ACA, and discrimination.

The easiest method is just to go back to standard HR "same pay for same work" rules and give similar raises to all similarly situated employees. So, the "% of pay" in your option #2 works, and a flat bonus to everyone works. Personally, I would move away from the age-group option (it opens a couple of cans of worms) and I would recommend not basing it on the actual premium either.

Remember that this option requires the employer to similarly compensate all employees, even the ones that previously waived their rights to the company's group health plan.

Then the employer must detach himself from the decisions each employee makes about how to use that "raise".

Now, having said that...... Many small business run things by the seat of their pants, and don't always follow those non-discrimination values written above! Even if they don't, I would still steer away from basing the "raise" on the premium or the person's age.

Thanks Ann, I have competition for a 40 life group that is telling them to base the employer pay increase on age bands. I have been doing some research today as this will impact other groups as well:

The DOL technical release 2013-03 states:

"Individual employers may establish payroll practices of forwarding post-tax employee wages to a health insurance issuer at the direction of an employee without establishing a group health plan, if the standards of the DOL’s regulation at 29 C.F.R. §2510.3-1(j) are met."

The regulation sited states:

(j) Certain group or group-type insurance programs. For purposes of title I of the Act and this chapter, the terms “employee welfare benefit plan” and “welfare plan” shall not include a group or group-type insurance program offered by an insurer to employees or members of an employee organization, under which
(1) No contributions are made by an employer or employee organization;
(2) Participation the program is completely voluntary for employees or members;
(3) The sole functions of the employer or employee organization with respect to the program are, without endorsing the program, to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and
(4) The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.


Basically, no contributions can be made by the employer or it can not endorce any particular program. It would seem that presenting multiple carriers in the market would take care of the latter. But basing the wage increase on age bands would be tough to prove it wasn't a health insurance contribution or only doing it for employees that have coverage. Even just giving pay increases based with the amount based on age seems like it would be a discrimination issue.
 
Ask the owner if he has $1.46 Million in reserves to pay the fine for doing this ($36,500x40 EE's). Clearly, it doesn't comply: raise is dependent on insurance, and is based on the cost of insurance, 2 big no-no's.

When he tells you that the other broker insists it's legal, remind him that every con and Ponzi scheme relies on a reputable looking guy promising a bunch of marks that it's legit.

If he comes to his senses, write a compliant group plan (defined contribution if he needs to control costs) and know you did the right thing. If not, walk away before you're named in the inevitable lawsuit.
 
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