October Question of the Month: Can an employer have 2 classes of employees for insurance premiums and an FSA?


Gina – An employer wants to have two different classes of employees where they offer to pay more insurance premiums for one class than another.  Example:  For Class 1, they pay 100% for employees and 100% for dependents of the base medical plan cost.  For Class 2, they pay a lower amount for employees and dependents. They also have a Section 125 Plan. How will this impact their FSA?   – Sandy W., Benefits Consultant


Great question Sandy.  Well, chances are the insurance company will allow it….but the FSA will not.  Different employer contributions for a medical plan for different classes of employees will not pass the Contributions and Benefits Test (test #2 of 3 for Section 125 Plans).  The requirements to meet this test are as follows:

  1. Employer contributions for benefits must be nondiscriminatory (i.e. the same).
  2. No rank-and-file employee can be charged more than any similarly situated highly compensated employee for the exact same benefit.

Why have nondiscrimination rules for Section 125 Plans at all?

FSA Plans offer tax savings under the Code and were designed to make sure rank-and-file employees benefit the most from the plan. Although Congress does not object to letting an employer’s executives get some tax benefits as a byproduct, they want to make sure that providing benefits to these individuals is not the primary focus of the program. As a result, the Code’s nondiscrimination rules are generally designed to prevent plans from discriminating in favor of individuals who are either highly compensated or otherwise key to the business.

The bottom line is if you have a Section 125 Plan, you can’t pay different premium amounts for different classes of employees – unless of course you pay more of the non-highly compensated employees’ premiums.

– Gina

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