Benefits, particularly health insurance coverage, are a vital part of the compensation and satisfaction formula for employees. Most companies recognize the importance of providing affordable and comprehensive options for their staff and the need to fulfill their obligations under the Affordable Care Act.
Since the ACA requires employers with 50 or more full-time employees (or the equivalent in part-time staff) to offer health insurance and allow dependents to remain on their parents’ insurance plans longer than was previously possible, employers have experienced increases in their cost to fund these benefits. In addition, the ACA also limits the amount of the price that an employer can pass along to the employee, as it requires that the cost to the worker must be “affordable” (defined as no more than 9.66 percent of the household income. These provisions are a small portion of the ACA but have caused many employers of all sizes to reconsider their approach to insurance benefits.
With the “great resignation” making it harder for employers to maintain full staffing, this is a perfect time to evaluate your benefit plans and consider any tweaks that can help you get the most for your investment. The experts here at Taylor Benefits are ready to assist.
According to the Kaiser Family Foundation, premiums for employer-offered health care coverage rose four percent in 2021 and now average over $22,000 for a family. The employee is expected to contribute more than one-quarter of the cost. In many cases, employees pay little or nothing for coverage only for themselves while paying increasing amounts to include family members. This approach is often viewed as equitable since the cost to the company increases with each additional person included.
To comply with the ACA and maintain affordability for lower-paid employees, some larger companies choose to use salary bands to determine the cost of insurance. As a result, a worker who earns less would pay a lower premium for their coverage and might also have a lower deductible amount or co-payment obligation, if applicable.
For employers with large workforces, particularly if the employees range across a spectrum of pay levels, using a salary-based structure to charge for health insurance might make sense. For example, according to the ACA standard of affordability, if an employee earning $50,000 per year pays $4,000 for insurance, that’s legal. However, it creates a more significant burden for that worker than the same cost poses for a worker earning $100,000 at the same company.
The short answer is—that it might be or might not be. Taylor Benefits strongly recommends a consultation with our experts to assess your potential exposure. For example, providing a more significant benefit to lower-paid employees (such as by offering those workers a reduced premium for their health care coverage) is not considered discriminatory. However, employers can risk unwelcome scrutiny of their benefit plans if the offerings instead favor the highly compensated sector or “key” staff. Therefore, the company should ensure that the structure can pass the nondiscrimination test to ensure that highly compensated employees do not receive greater benefits than other employee groups.
Fortunately for employers seeking to incentivize executive-level employees, there are exceptions to the nondiscrimination rules. The ACA requirements are limited to health plans and specifically exclude “excepted benefits.” Companies can offer the excepted benefits packages to smaller subsets of workers without concern for legal exposure. Excepted benefits include:
As companies evolve and change their benefit offerings, it has become common practice to freeze some benefits, continuing to offer them for existing employees but ceasing to extend them to new hires. This cost-saving solution is often employed when a business wants to move from a defined-benefit retirement plan to a defined contribution option like a 401(k). A growing company can use this tactic for other benefits as well. For example, a start-up might be able to pay for childcare for the handful of people who get the enterprise going but find they can’t continue to pay a costly stipend as the employee count explodes past 300. So, at some point, they quietly “grandfather” the early hires in with permanent eligibility and excise the offering from their benefits list for anyone hired after a specific date. Because the determination of eligibility is based on hire date, not salary or executive status, it is legal.
Todd Taylor, oversees most of the marketing and client administration for the agency with help of an incredible team.
Todd is a seasoned benefits insurance broker with over 35 years of industry experience. As the Founder and CEO of Taylor Benefits Insurance Agency, Inc., He provides strategic consultations and high-quality support to ensure his clients’ competitive position in the market.
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