Can an Employer Offer Different Benefits to Different Groups of Employees?

The Health Insurance Portability and Accountability Act (HIPAA) prohibits group health plans and group health insurance issuers from discriminating against individuals with regard to eligibility, premiums, or coverage based upon a health status-related factor.

The HIPAA nondiscrimination provisions set forth eight “health factors” that may not be used to discriminate in health coverage among individuals:

• health status
• medical condition (including both physical and mental illnesses)
• claims experience
• receipt of health care
• medical history
• genetic information
• evidence of insurability (including conditions arising out of acts of domestic violence and participation in risky recreational activities)
• disability

Similarly Situated Individuals

While distinctions cannot be based on any of the health factors listed above, employers may provide different health benefits to different groups of employees, so long as the individuals are not “similarly situated individuals.” Any employee classifications must be based on a bona fide employment-based classification consistent with the employer’s usual business practice.

The following classifications may reflect distinct groups of similarly situated individuals:

• full-time vs. part-time employees
• participants vs. beneficiaries
• employees with different dates of hire
• employees working in different geographic locations
• union vs. non-union members
• employees with different lengths of service
• current vs. former employee
• relationship to the plan participants

If the individuals are in distinct groups of similarly situated individuals, the employer may impose different eligibility provisions, different benefit restrictions, or different costs, provided the distinction is consistent with the employer’s usual business practice.

Exception for Benign Discrimination

The nondiscrimination rules do not prohibit a plan from establishing more favorable rules for eligibility or premium rates for individuals with an adverse health factor, such as a disability.

Other Nondiscrimination Requirements

Compliance with the HIPAA nondiscrimination rules does not guarantee compliance with other nondiscrimination requirements under Section 105(h) for self-insured plans and Section 125 for cafeteria plans. Under the Section 105(h) and Section 125 nondiscrimination rules, an employer is prohibited from discriminating in favor of highly compensated individuals.

In some instances, an employer may impose class differentiations that are permissible under the HIPAA nondiscrimination rules, such as distinctions based on length in service, which may not comply with the Sections 105(h) and 125 rules if it discriminates in favor of highly compensated individuals. Accordingly, when designing a plan with different eligibility provisions, benefit restrictions, or costs, it is important to assess whether to plan design based on class differentiations complies with all benefit nondiscrimination rules.

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