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Strings Attached: Changing Premium Contributions for Cost Savings

COVID-19 is creating difficult decisions for employers that are desperate to keep their business afloat while also trying to take care of their employees. To avoid furloughs, layoffs, and other changes that may cause employees to lose access to their health insurance, employers are looking for creative solutions to cut costs.

One of the quickest and most popular ways for employers to cut costs while still offering health insurance to their employees is to adjust the employee’s required premium contribution. Making mid-year changes to your contribution strategy, however, is not a “no strings attached” proposition.

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 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 violation 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 have minimum contribution requirements.

      5. Many states set a minimum contribution requirement for employers mandating it to contribute at least 50% of the employee’s insurance premium. The exact requirement varies by state. Employers should exercise caution when making contribution changes that significantly reduce its responsibility for a portion of the premium.

      6. 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. The ACA defines affordable coverage as the employee’s contribution for the lowest cost employee-only plan not exceeding 9.78% 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.

      For more information on evolving compliance regulations the wake of the COVID-19 pandemic, visit the  OneDigital Coronavirus Advisory Hub,  or reach out to your local OneDigital advisory team.


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