What are the Employee Retirement Income Security Act (ERISA) rules about nondiscrimination in benefits plan designs to assist with creating benefit class carve-outs?
Under the Health Insurance Portability and Accountability Act (HIPAA, which is governed by ERISA) and I.R.C. § 125 plan rules, employers are allowed to offer different contribution levels or benefit coverage levels based upon legitimate nondiscriminatory business classifications.
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 (benefit classes) of similarly situated individuals. Plans that favor highly compensated employees may violate the nondiscrimination provisions that § 125 cafeteria plans are subject to or I.R.C. § 105(h) if the plans are self-funded. Additionally, employers must keep in mind whether any carve-outs they are considering could create an unintended discriminatory impact. The onset of the Affordable Care Act has added new regulations for insured plans, mirroring those currently found in § 105(h) regarding nondiscrimination in health and welfare plans but these regulations are on hold pending additional guidance from the Internal Revenue Service.
Due to the complexity of testing plans for compliance with the nondiscrimination rules of I.R.C. § 105(h), any employer considering offering health benefits to only certain classes of employees should carefully review all of the provisions of that section and its accompanying regulations, work closely with the benefits broker to structure the plan design and seek the advice of a knowledgeable benefits law attorney for specific guidance on its particular plan.