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Employee Contribution Strategy

Many employers looking for ways to reduce employee benefit costs do so by shifting cost to employees through plan design changes or employee contributions.  But as employer shared responsibility penalties become a reality in 2015, increasing employee contributions could drive lower paid employees to the exchanges, thereby triggering penalties.  So the dilemma many employers face is how to increase employee contributions without making the coverage unaffordable to employees, or perhaps employee contributions are already at a level that makes the coverage unaffordable to some employees.  When the employee base is a mix of high and low paid employees like so many companies are, there is another option.  Reducing employee contributions to make the employer sponsored coverage affordable for all employees may mean drastically reducing contributions and shifting a lot of cost back to the employer. 

The good news is that the laws and regulation on discrimination do not protect higher paid employees.  In fact, non-discrimination laws prevent employers from providing better benefits to higher paid employees, but not the opposite and the Affordable Care Act explicitly states that employers are not prevented from requiring higher paid employees to pay higher contributions.  Section 1001 of the ACA revises the Public Health Service Act as follows:

SEC. 2716. PROHIBITION OF DISCRIMINATION BASED ON SALARY.
(a)IN GENERAL.—The plan sponsor of a group health plan (other than a self-insured plan) may not establish rules relating to the health insurance coverage eligibility (including continued eligibility)of any full-time employee under the terms of the plan that are based on the total hourly or annual salary of the employee or otherwise establish eligibility rules that have the effect of discriminating in favor of higher wage employees.
(b) LIMITATION.—Subsection (a) shall not be construed to prohibit a plan sponsor from establishing contribution requirements for enrollment in the plan or coverage that provide for the payment by employees with lower hourly or annual compensation of a lower dollar or percentage contribution than the payment required of similarly situated employees with a higher hourly or annual compensation.

Therefore, as stated in (b), an employer may require higher paid employees to pay higher contributions.  One way to do this that would not likely be construed as unfair and would ensure coverage is affordable for all employees is to set employee contributions at a fixed dollar amount that the employer prefers, and as high as they want, but lower the contributions for individual employees to be no more than 9.5% of their annual income with the employer.  This takes advantage of the first affordability safe harbor by ensuring that the employee contribution towards employee only coverage is no more than 9.5% of the W-2 income.  At the same time, higher paid employees will pay the full contributions that the employer would like them to pay.  This strategy means that contributions will be reduced for lower paid employees to 9.5% of their W-2 income, but all higher paid employees will pay the full contribution set by the employer.


1 comment | Add a New Comment
1. Jack R. | January 29, 2014 at 09:57 AM EST

The minimum goal of every employer-sponsored group plan is to keep the group plan in place. With employee contributions increasing, many employer plans are experiencing drops in employee participation.

To keep your contract from terminating, most carriers require 50 percent of eligible employees to participate. Some ask for quarterly wage and tax reports upon renewal to verify participation levels.

Thanks,

Jack @ a href=\http://www.linkedin.com/company/direct-accident-management\Direct Accident Management/a

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