Strings Attached: Changing Premium Contributions for Cost Savings

Recent executive orders and regulatory changes are creating uncertainty for employers, forcing them to make difficult decisions about their workforce and benefits strategies.

As businesses navigate this shifting landscape, many are seeking cost-saving measures that allow them to remain compliant while continuing to support their employees.

To avoid drastic workforce reductions, some employers are exploring ways to cut costs without eliminating employee health insurance. One option that has gained attention is adjusting employees’ required premium contributions. However, making mid-year changes to your contribution strategy is not without compliance risks.

Key Compliance Considerations for Mid-Year Contribution Changes

Here are the top five compliance considerations employers must remember when making mid-year contribution changes.

1. Provide appropriate notice to plan participants.

   ERISA requires that an ERISA-covered plan provide plan participants with a summary of material modification notifying the participant of a material reduction in benefits no later than 60 days following the effective date of the change, or a material modification to benefits no later than 210 days after the end of the plan year. Changing contributions to reduce costs would be a material reduction in benefits requiring notification by the earlier deadline.

2. Mid-year contribution changes may trigger an opportunity for participants to change their elections.

   Under the Section 125 rules, a significant cost change triggers the opportunity for plan participants to change or revoke their benefit elections to the extent that the change is consistent with the significant change in cost. For this rule to apply, the employer must include this event in its Section 125 plan documents.

3. Certain contribution strategies may violate nondiscrimination rules.

   Under the HIPAA nondiscrimination rules, employers may provide different health benefits to different groups of employees, so long as the individuals are not “similarly situated.” 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. Accordingly, when a contribution strategy varies cost, it is important to assess whether to plan design based on class differentiations complies with all benefit nondiscrimination rules.

4. Most states and/or insurance carriers have minimum contribution requirements.

   Many states and insurance carriers set a minimum contribution requirement for employers. Most mandate employers contribute at least 50% of the employee’s insurance premium. The exact requirement may vary by state and carrier. Employers should exercise caution when making contribution changes that significantly reduce their responsibility for a portion of the premium. Before making any changes, check state law and contracts with the insurance carrier.

5. The ACA requires ALEs to offer affordable coverage.

   Under the Affordable Care Act (ACA), an applicable large employer (ALE) is required to offer minimum essential coverage that is affordable and provides minimum value to substantially all of its full-time employees. For 2025, the ACA defines affordable coverage as the employee’s contribution for the lowest cost employee-only plan not exceeding 9.02% of the employee’s income. For employees that remain employed as full-time employees, the coverage must remain affordable for the employer to avoid a penalty assessment. When making mid-year contribution changes to cut costs, employers must be mindful not to create additional costs via an ACA penalty by offering unaffordable coverage.

While adjusting employee contributions may be a necessary cost-saving measure in response to financial concern, employers must proceed with caution to avoid unintended compliance risks. Before implementing changes, consult with a OneDigital advisor to develop a strategy that balances cost containment with regulatory compliance and employee wellbeing.

As federal policies continue to evolve, rely on our team of compliance leaders to help you stay on top of key actions, pending legislation, and regulatory changes that may impact your organization. Visit the OneDigital's resource page for real-time updates: Federal Policy Updates for Employers: What to Watch in 2025.