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The 9.5% Conundrum: Discrimination in Employee Contributions

Posted in Plan Administration, Welfare Plans

When considering what constitutes “affordable” coverage under PPACA, some employers have come to me and said “well, I will just charge everybody 9.5% of their pay.”  And on its face, that seems to be what the rule permits.  But as with other components of PPACA, Congress may have overlooked that our old friend ERISA already has a little something to say about what employees can be charged as a contribution.

Generally, ERISA does not require plans to provide the same benefit coverage to all employees. But the plan’s offerings have to be made in a manner that is non-discriminatory.  HIPAA makes it illegal to charge different contributions to employees based on health factors.  Specifically, an employer cannot charge some employees more than any other similarly situated individuals based on medical conditions, claims experience, receipt of health care services, genetic information or disability.   But HIPAA does allow an employer to make other distinctions in benefits that are offered and in the cost to employees provided the distinctions are not “discriminatory.”

In order to avoid discrimination, plans have to limit their distinctions between employees to “bona fide employment-based classifications.”  The most common examples are things like full-time or part-time status, geographic locations, and salaried versus hourly employees.  In some instances, it may even be permissible to charge different rates based on time of service, but employers have to be wary of age discrimination rules.  But what is clear is that the plan clearly has to define the rules and explain how the rules apply to each classification of employee.

What employers should be considering when as they prepare their compliance program for 2015 is how they define these job classifications.  For example, two employees do the exact same job and one makes $10 an hour and the other makes $10.50 per hour simply because they have been employed a year longer.  If the employer charges both of these employees 9.5% of their wages for health insurance contributions, there would be “discrimination” between them because they are similarly situated employees being charged two different rates for the same benefit coverage.  Absent plan rules that explain the distinction, this difference in contributions would be discriminatory and arguably impermissible under ERISA.

So before assuming that everyone can be charged 9.5% of box 1 of their W-2s, consider what ERISA already has in place.  It is not that it can’t be done per se, only that it has to be done properly, with the right plan language and with the correct limits in place.  PPACA compliance is also ERISA compliance and employers should seek assistance for compliance with both.