With the exception of 401(k) plans and flexible spending plans, employers can be fairly creative in their eligibility language. For all other benefits, the rules of eligibility are determined both by the insurance carrier and the employer. Note that certain tax consequences can occur if benefits are funded by the employer for the sole benefit of the owners and/or officers.
The accompanying chart outlines the three main eligibility criteria from the carriers hours worked, employer contribution and length of employment. These apply to group products for which the employer pays for all or a percentage of the cost. The most common group policies include medical, dental, life insurance, disability insurance and vision.
The remaining rules of eligibility are determined by the employer. It’s recommended that as an employer, you establish employee classes if you want to offer different benefits to certain people or at different contribution levels.
Name classes in a generic manner, such as Class 1, Class 2 and Class 3. Also, use Class 1 for the “rank and file” employees. If the class codes become known by other employees, and they will, you don’t want the impression that they are less important through the impression of being a Class 4 employee. The fact that you have classes will generate class envy. This is one of the dangers of having different classes within the same employer.
Once you establish the names of the classes, you can indicate what job titles or other requirements are included. In addition to job titles, you could use employee locations, income levels, exempt or nonexempt status, time on the job or several other factors.
Once you establish the definitions of the classes, you can define the benefits of being in a particular class.
You may decide that some benefits may only be provided to certain classes. Some classes may get different levels of benefits, as is common with company paid life insurance and disability plans. Class 1 employees (rank and file) may not need Own Occupation protection to SSNRA (Social Security Normal Retirement Age), but Class 4 employees (owners and officers) might.
Setting up classes can be a great tool. It can also help solve some participation problems. Some employers are having a hard time with minimum participation levels because the employee contributions are too high for certain employees. Offering medical benefits to a certain class of employees, such as management, sales or higher-paid employees, can help maintain the minimum participation requirement of 50 percent of all eligible employees.
Establishing classes can be problematic, so be careful. Someone that you didn’t expect might qualify at a later time. The more classes you have, the harder it is to track and manage the benefits.
Carriers can also get nervous when eligibility classifications change. The carriers might think you are making an exception and not just establishing a new class. Converting a currently enrolled employee to a new class is seldom a problem because of promotions and other changes. But adding a new class that allows a new person(s) to join the plan or get better benefits can be a concern for the carriers.
The result could include the carrier requiring underwriting approval, including evidence of insurability, before granting the change.
The bottom line is that you have numerous options, but once you establish eligibility classes, you need to stick to them. Consistency is the key.
Employers will get themselves into trouble if they stray off your establish classes, whether in writing or in practice.
BRUCE BISHOP (email@example.com) is director of marketing and managing partner of KYBA Benefits. The company provides consulting and administrative services to more than 400 corporate accounts, ranging in size from 20 to more than 7,000 employees. Reach Bishop at (770) 425-6700 or (800) 874-2244 x205.