This is an FAQ!

Perhaps one of most frequently asked (and most frequently mis-answered) questions that agents receive from employer clients is whether they can offer coverage to just certain employees, or vary their benefits offering and/or employer contribution among classes of employees.

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There are various versions of this question, but it really boils down to this:

When it comes to benefits, are employers allowed to treat employees differently?

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Possible Answer #1

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Possible Answer #2

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Possible Answer #3: It depends.

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Possible Answer #4: I have no clue.

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Have we been giving the right answer?

Most brokers are confused by this question because we’ve heard, time and time again, that employers, or at least small employers, must treat all employees the same. But is that true, or is varying benefits and contributions actually allowed?

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The real answer? It depends.

The answer to this question depends in part on federal law, in part on state law, and in part on carrier rules.

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Course Objectives.

• In this class, we’ll discuss this question in depth, take a look at the laws and underwriting rules, and provide clear guidance about what is and is not allowed.
• You will (hopefully) leave this course with a much better understanding about what your clients can and cannot do so you can finally answer this question correctly rather than just guessing.
• My goal is not to just tell you what the law is but rather prove to you what is and is not allowed. That’s the only way you will feel comfortable advising your clients about the do’s and don’ts.

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I did NOT want to write this class

I wanted it to be written, and I begged my friend Vanessa (an attorney, agent, and college professor) to write it. She never did.

It wasn’t until I started a consulting gig with an agency that sells small group plans nationwide that I realized the rules vary from state to state.

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Possible variations in benefits and contributions

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FEDERAL LAW

Let’s start at the top.

• We’ll begin by looking at what’s allowed, and what’s prohibited, at the federal level.
• If the feds say we can’t do it, there’s no reason to look any further.
• But if the feds say we can, that would seem to give us the green light unless we find conflicting info at the state or carrier level. Does that make sense?
• Some brokers may be uncomfortable with this. Some take the approach that if it doesn’t say we can do it, it means we can’t. Others take the approach that if it doesn’t say we can’t do it, it means we can.

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There are three primary laws that we can refer to for answers to this question.

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What does ERISA say?

Word & Brown does a good job of explaining the ERISA rules: https://wordandbrown.com/NewsPost/Varying-Employer-Contributions-and-or-Employee-Wai

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What does HIPAA say?

Not much.

How do you determine “similarly situated individuals”?

HIPAA states that plans may distinguish among employees only on “bona fide employment based classifications” consistent with the employer’s usual business practice. For example, part time and full time employees, employees working in different geographic locations, and employees with different dates of hire or lengths of service can be treated as different groups of similarly situated individuals.

A plan may draw a distinction between employees and their dependents. Plans can also make distinctions between beneficiaries themselves if the distinction is not based on a health factor. For example, a plan can distinguish between spouses and dependent children, or between dependent children age 26 and older based on their age or student status.

Source: https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/hipaa-consumer-faqs.pdf page 5

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What does the ACA say?

Again, not much.

From the Employer Mandate Final Rule: Section 2708 of the PHS Act does not require the employer to offer coverage to any particular employee or class of employees…

As explained by the IRS, section 4980H(a) of the tax code (the Employer Shared Responsibility Requirement) requires Applicable Large Employers (ALEs) to offer minimum essential coverage (a group plan) to 95% of full-time employees (130+ hours/month) or face an across-the-board penalty on all but the first 30 full-timers.

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A final statement about what’s allowed under federal law

From SHRM “Are Employers Allowed to Offer Different Benefits to Different Employees?”: In summary, it is not necessary under federal laws to give equal benefits to all employees, but an employer should base benefit eligibility on tenure, full- or part-time status, exempt/nonexempt status, job group or even department. An employer must exercise due diligence to ensure its benefits are not discriminatory.

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Another Federal Law – IRC Section 125

• We also need to look at section 125 of the tax code, because even if we are allowed to exclude certain employees from coverage or vary our contribution among classes, we might not be able to set up a 125 plan so that they can pay their share of the premiums on a tax free basis.
• If, for instance, we offer coverage only to management employees but not to non-management, that might fail section 125 non-discrimination testing.

Sharon, please join me at the front of the room.

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Let’s look at the different possibilities again

If these are allowed, should they be offered through a Section 125 plan?

• Carve-outs: offering coverage to some employees while excluding others
• Varying benefit offering among different classes of employees
• Varying employer contributions among different classes of employees
• Varying benefits and contributions based on tenure
• Varying the waiting period among classes of employees
• Excluding dependent enrollment for certain classes of employees

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Similarly, if these are allowed, should they be offered by self-funded employers?

Source: Google AI, verified by ChatGPT and Sharon Alt

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STATE LAWS

Are there variations from state to state?

To make sure we haven’t missed something at the federal level, we can examine various state laws to see if we can find examples where one or more of the possible variations in benefits and contributions is allowed.

If so, it must be allowed at the federal level. If we find that these variations are permitted in some states but not allowed in others, that tells us that any prohibition on these practices must be either at the state or carrier level, not the federal level.

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Excerpts from Different Carriers’ Underwriting Guides

Some of these practices (carve-outs, varying benefits and contributions) are allowed by fully-insured small group carriers in other states. And the fact that some of these strategies are allowed indicates that they’re 1) legal in those states and 2) legal at the federal level.

• Anthem NV: Class carve-outs such as management only or salary vs non-salary may be considered with underwriting approval. A list of the job classifications the employer wants to insure will be required with the initial group submission. All employees must be accounted for, and those in the carved-out classification must be identified. These carve-out groups are subject to underwriting approval and may be declined if they do not meet Anthem’s underwriting criteria.
• Anthem VA: Restricting products by class of employee is not allowed. The group may vary the contribution amount by class of employee.
• Highmark DE: Delaware’s small group law (Chapter 72, 18 Del. C. Section 7207(c) (6)a and Regulation 1308) requires that HM offer coverage to all eligible employees of a small employer and their dependents. For small group, HM is not permitted to offer coverage only to members of a certain employee class. Employers that have union employees who are provided health coverage through a separate union organization may choose to only cover non-union employees. Groups may offer differing levels of coverage and contributions and apply different hourly and new hire waiting period requirements to various employee classes (e.g., hourly/salary, union/non-union, etc.). The employee classes must be verifiable and directly related to employment divisions and the segmentations must exist for purposes other than insurance coverage.
• Highmark PA and WV: Employers seeking to only cover management employees, while carving out nonmanagement employees, must submit the request in writing on group letterhead and a year-to-date payroll register that identifies the employee class. Employers that have union employees who are provided health coverage through a separate union organization may choose to only cover non-union employees. Groups may offer differing levels of coverage and contributions and apply different hourly and new hire waiting period requirements to various employee classes (e.g., hourly/salary, union/non-union, etc.). The employee classes must be verifiable and directly related to employment divisions and the segmentations must exist for purposes other than insurance coverage.
• Blue Shield of CA: Carve-outs are Not Allowed. When union employees receive health coverage through the union trust fund established by a collective bargaining agreement, then only non-union employees are eligible for coverage.
• UHC AL, AR, IA, IL, KS, LA, MI, MO, MS, NE, TN: Carve-outs are permitted for Management/Non-Management, Salary/Hourly, Union/Non-Union
• UHC AZ, CO, ID, MT, NM, UT, WY: Carve-outs are permitted for Management/Non-Management, Salary/Hourly, Union/Non-Union. Requires minimum 5 EE’s enrolling.
• UHC DC and VA: Carve-outs are permitted for Management/Non-Management, Hourly/Salaried, Union/Non-Union, Owners/Non-Owners (UW approval required in VA)
• UHC ND: Underwriting approval required for a class-out (no carve-outs)
• UHC NJ: Class carve-outs are allowed as long as the small group employer is not sponsoring another plan for the excluded employees/classes.
• UHC upstate NY: Carve-outs Not Allowed. Oxford: An employer may elect to offer coverage to a class of employees based on conditions pertaining to employment, such as geographic situs of employment, earnings, method of compensation, hours and occupational duties. Coverage may be limited to specific class(es) of employees if they are the only employees offered coverage.

CARRIER RULES

Even if it’s legal, it may not be permitted by the carrier.

• It is possible that a benefit offering or contribution strategy might be legally permissible at both the federal and state level but not allowed by a carrier.
• For that reason, we need to search for variations in the rules among carriers in the same state.

Again, from Word & Brown:

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TEXAS LAW

What’s allowed in the state of Texas?

• With our federal, state, and carrier research done, we can now focus on providing answers to the various questions as they apply in the state of Texas.
• As we do, we’ll discuss whether the rules are different for large and small group carriers. We don’t need to examine fully-insured vs. self-funded or level-funded plans since those are not governed by state law.
• The governing law in the state of Texas is the Texas Insurance Code (laws passed by the legislature) and Texas Administrative Code (rules written by TDI) along with The TDI website and TDI commissioner’s bulletins.
• Important point: Most of the rules in the Texas Insurance Code and Texas Administrative Code apply to fully-insured carriers (“issuers of health insurance”), not employers.

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Carve-outs: offering coverage to some employees while excluding others

The Texas Insurance Code isn’t very clear: https://statutes.capitol.texas.gov/Docs/IN/htm/IN.1501.htm#1501.002

TDI is a little more clear: https://www.tdi.texas.gov/pubs/consumer/cb040.html

My take on this is that fully-insured small employers in Texas cannot exclude classes of employees (carve-outs). Do you agree?

We know from pre-ACA practices that fully-insured large employers can exclude classes of employees, but, under the ACA, Applicable Large Employers should not because they could be subject to an across-the-board penalty on all but 30 of their full-timers under the employer mandate (section 4980H(a)).

Self-insured employers, regardless of size, can exclude classes of employees, but doing so could be a violation of section 105(h) and section 125.

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Varying benefit offering (plan options) among different classes of employees

The Texas Insurance Code and Texas Administrative Code are silent on this issue, which implies that employers can vary benefits among bona fide classes of employees.

The fact that Individual Coverage HRAs (ICHRAs) allow both small and large employers can offer group health coverage to one class of employees and reimbursement for individual plans to another class seems to confirm that varying benefits among classes is permissible.

Also, many of us who market to employers have small group clients with out-of-state employees. In-state employees are offered both PPO and HMO options while out-of-state employees are offered PPO options only. So we’re already doing this, even if we didn’t realize it.

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Varying employer contributions among different classes of employees

The Texas Insurance Code and Texas Administrative Code are silent on this issue as well, which implies that employers can vary contributions among bona fide classes of employees.

I have personally asked both UHC and BCBSTX small group what their contribution rules are for different classes of employees and was told by each that they do not get involved in this or monitor it. They just require that contributions for all classes of employees meet their minimum contribution requirement (50% of the employee only premium for the lowest-priced plan offered).

Again, for those of us with small group clients with out-of-state employees, the employer might offer 50% of the lowest-priced HMO available in Texas and 50% of the lowest-priced PPO for out-of-state employees to meet the carrier’s requirements. In those cases, the employer is offering different contributions for different classes of employees.

My take is that varying contributions among bona fide employee classes is allowed for both large and small employers in the state of Texas. Do you agree?

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Varying benefits and contributions based on tenure

Again, this is specifically allowed at the federal level. And, again, the Texas Insurance Code and Texas Administrative Code are silent on this issue as well, which implies that employers can vary benefits and contributions based on tenure

This is a strategy we have long used in our office with multiple clients, even when we didn’t think varying benefits and contributions among different employee classes was allowed.

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Varying the waiting period among classes of employees

The Texas Insurance Code and Texas Administrative Code are silent on this issue as well, implying it is permissible.

That said, the carriers’ systems may not be able to accommodate varied employee waiting periods for different classes of employees. And for that reason, carrier rules might prohibit this.

It might be possible given that carriers are already dealing with varied waiting periods for full-time and variable hour employees, but it’s a question you will need to ask the carriers you work with.

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Excluding dependent enrollment for certain classes of employees

This seems to be allowed for large employers, given the different codes on the 1095C forms they are required to file. Some of the codes are for employers that offer coverage to the employee and children but not a spouse.

This is actually a requirement under the employer mandate – coverage must be offered to the employee and the employee’s dependents. Dependents are defined as children, but not spouses – spouses can be excluded from coverage.

We’ve already seen the wording on the TDI website that small employers must offer coverage to all full-time employees and their dependents: “Texas insurance law defines a small employer as a business with two to 50 employees, regardless of how many hours the employees work. If you provide health insurance, you must offer it to all your employees who work 30 hours or more each week. You must also offer coverage for their dependents. Business owners can enroll in their small-employer health plan if at least one of their employees also enrolls.”

There does not appear to be similar language for large employers.

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What if there’s a 125 plan in place?

We’ve already discussed this. Many strategies that are permissible at the federal and state level may require the employer to offer benefits on an after-tax basis as the strategy may cause the plan to fail section 125 discrimination testing.

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Bonus Question #1

Can a plan charge a lower premium for nonsmokers than it does for smokers?

Source: https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/hipaa-consumer-faqs.pdf page 5

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Bonus Question #2

Can states modify HIPAA’s requirements?

Source: https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/hipaa-consumer-faqs.pdf page 5

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Bonus Question #3

Can a small employer (fewer than 20 employees, Medicare primary) force a Medicare-eligible employee off the group plan?

• We know that, due to TEFRA and the Medicare Secondary Payer rules, this is not allowed for groups of 20+ (where the group plan is primary).
• And we know that small employers (fewer than 20 employees, Medicare primary) can incentivize Medicare-eligible employees to drop off the plan by offering to pay all or part of their Medicare Part B, D, and supplement premiums (through a Medicare Premium Reimbursement Arrangement).
• But can those same small employers force Medicare-eligible employees of the plan?

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The Answer

As we just saw, the federal answer and the state answer may not be the same. States can pass laws that are more protective of the consumer, and those would override the federal law.

Federal Law: Most of the guidance is related to the Medicare Secondary Payer rules and what employers with 20+ employees cannot do. We have to read between the lines to determine what small employers not subject to the MSP rules can do.

The below slides are from a CMS course about MSP rules when an employee/dependent is eligible for Medicare based on age (https://www.cms.gov/medicare/coordination-of-benefits-and-recovery/coordination-of-benefits-and-recovery-overview/medicare-secondary-payer/downloads/msp-working-aged.pdf).

Does the fact that the MSP rules say an employer cannot discontinue coverage for Medicare-eligible employees and spouses mean that small employers not subject to the MSP rules can do that?

Here’s what Google’s AI tool says:

Here’s what ChatGPT says:

Here’s what Forbes says: https://www.forbes.com/sites/dianeomdahl/2024/04/04/can-your-employer-force-you-to-enroll-in-medicare/

If Google, ChatGPT, and Forbes are right, does that mean we can do this in Texas?

I don’t think so. Remember what TDI says: https://www.tdi.texas.gov/pubs/consumer/cb040.html

This would seem to include employees who are eligible for Medicare as well.

My take on this is that the federal rules allows small employers (where Medicare is primary) to exclude Medicare-eligible employees, but Texas law likely does not. Do you agree?

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How should we advise our clients?

• Contrary to popular belief, the federal government does not put many restrictions on the benefit and contribution strategies employers are allowed to adopt.
• Instead, most limits on these strategies occur at the state level. This is certainly true in Texas, where some practices that are allowed in other states (like carve-outs for small groups) may not be permitted.

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Carrier rules may differ from state and federal law

• Even when legal, some carriers place limits on what they will allow employers to do. The reason for these limitations could be to reduce the risk of adverse selection; it could be due to system limitations; or it could be due to a lack of understanding of the law.
• It’s important to know that some carriers adopt a “don’t ask, don’t tell” approach to an employer’s benefits and contribution strategy – they leave it up to the employer to follow any applicable laws and do not get involved in interpreting or enforcing the law; they’d rather just not know.

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Worth Reading

From One Digital: Can an Employer Offer Different Benefits to Different Groups of Employees?

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THANK YOU! Any Questions?

Eric Johnson | (817) 366-7536 | [email protected]

I will email you a link to this presentation.<