Unequal Health Insurance Benefits

als3553 · October 2002

A local governmental employer wants to change its health benefit package for employees. To cut costs, the employer wants to continue to provide full family coverage for current employees, but only individual coverage for new employees. Can the employer offer a different and unequal health plan to employees hired after a specific date?

Scott Ruth · October 2002

There is no prohibition on this type of arrangement. However, there is a potential for your highly compensated employees to have taxable income if the health plan is either self-insured or premiums are paid pretax through a cafeteria plan. A plan must be tested each year to determine if it discriminatory, but generally a plan will become discriminatory over time if it grandfathers the highly compensated employees and most of the turnover is among the nonhighly compensated employees.

Note that for purposes of a self-insured plan, the highly compensated employees are the top 25% of employees ranked by compensation. For purposes of a cafeteria plan, highly compensated employees are those making more than $85,000 last year.

jcrMN · November 2002

It is legal for employers to set up separate classes of employees and have different benefits for each class as long as they don't discriminate within the class. One class could be employees hired prior to a specific date and the other class employees hired after a specific date. The highly compensated employee requirements would apply to both classes.

Unequal Health Insurance Benefits

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