Preview of May Compliance Checkpoints: Employee Premiums and Contributions

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Tracking various laws and regulations impacting employee benefits can divert time and resources from your core functions such as recruiting top talent, developing strategic benefits and compensation programs, and meeting cost targets. After all, it takes a lot of work to sustain a destination workplace that attracts, retains, and engages the right people to increase your organization’s productivity and growth. How can you keep pace with evolving legislative and regulatory initiatives and still have the time, resources, and drive to sustain a destination workplace?

As a trusted advisor, Gallagher will help you navigate the ever-changing landscape of employee benefits compliance issues. This edition of Compliance Checkpoints is designed to help guide you as you work to decrease the risks associated with human capital management while maximizing your investment in your workforce, especially when dividing the cost of certain employer-offered benefits with employees. Check out the action steps below aimed at helping you steer clear of often overlooked landmines when charging employees a share of the cost of coverage through employee premium contributions.

  1. Deduct. Recognize. Revoke. If your organization permits employees to make pre-tax contributions for benefits, then you are operating a cafeteria plan and must obey the regulations under Section 125 of the Internal Revenue Code. That means that employee elections must remain irrevocable for the period of coverage (i.e., the plan year) unless a valid mid-year permissible change in election event occurs, such as the birth of a child. In addition, you need to ensure that any plan documents that you have for your specific benefits are consistent with the regulations and your cafeteria plan. Further, even in the absence of pre-tax contributions under a cafeteria plan, your insurance contracts may also set forth the conditions under which employee elections can change mid-year. For example, even though an employer may choose to accept certain mid-year changes due to changes in cost, an underlying insurance contract may not permit changes on such a basis. Are the rules applicable to your employee contributions consistent among your cafeteria plan, underlying benefits, and insurance documents?

  2. Consider. Quantify. Plan. When deciding to change employee contributions amount mid-plan year, employers should carefully consider the impact. Sometimes, unforeseen circumstances arise, such as a downturn in business conditions, which lead an employer to contemplate increasing employee contributions mid-year. It is possible to do so, but employers must evaluate both state law considerations and cafeteria plan rules to determine the effects of such a decision. In particular, state wage deduction rules may require an employer to obtain additional written authorization from employees for any contribution change. Further, cafeteria plan rules may treat this change as a “significant change in the cost of coverage,” which is a mid-year election change event that is recognized under the cafeteria plan regulations as potentially permitting employees to drop coverage. However, employers must determine what constitutes “significant” with regard to a “significant change in cost.” Does your organization have a game plan for potential changes in employee contributions related to changes in cost?

  3. Measure. Calculate. Avoid. As a survivor of recent repeal and replace efforts, the Employer Mandate under the Patient Protection and Affordable Care Act (“PPACA”) continues to drive employer concerns about the percentage of premium charged to employees. Employers subject to the mandate must ensure that their lowest-cost, self-only, minimum value coverage offered to full-time employees is affordable in order to avoid significant penalties. For 2018, coverage is affordable if the required employee contribution does not exceed 9.56% of the employee’s household income. For purposes of making this measurement, employers have only three affordability “safe harbors” that can be used – the rate of pay safe harbor, the Form W-2 safe harbor, and the federal poverty line safe harbor. Specific rules govern how the safe harbors apply and to whom they can apply. The use of the safe harbors is further complicated by additional rules that apply to opt-out bonuses, wellness incentives, and more. Which special rules apply to your organization’s affordability calculations to help you avoid Employer Shared Responsibility penalties?

  4. Monetize. Entice. Impact. In an effort to offer coverage to a sufficient number of full-time employees in order to avoid Section 4980H(a) penalties, a number of employers have turned to offers of opt-out bonuses, which are monetary incentives to employees who “opt-out” of an employer’s coverage – usually in favor of other employer-sponsored coverage. Some opt-out incentives impact affordability under the Employer Mandate. If an employer offers additional compensation to any employees who decline coverage under the employer’s health plan without requiring them to enroll in other coverage (an “unconditional opt-out incentive”), then the amount of the available opt-out incentive is added to the employee’s required contribution for purposes of measuring the plan’s affordability under PPACA. For example, if an employer pays a $100 per month incentive to employees who opt out of coverage without requiring those employees to have other coverage, then the $100 must be added to the cost of the lowest cost plan when determining affordability under PPACA. On the other hand, the IRS has proposed rules stating that conditional opt-out incentives (which are conditional on the employee and family enrolling in other minimum essential coverage) are disregarded when calculating affordability, as long as they meet certain requirements. How does your organization’s opt-out incentive impact affordability under PPACA?

And, there are six more action items this month. This is just a preview of the May issue of Compliance Checkpoints. If you would like the full version of Compliance Checkpoints or would like additional information on how Gallagher constantly monitors laws and regulations impacting employee benefits and supports employers in their compliance efforts, please contact your Gallagher representative or click here to Contact Us via

Compliance is a series of checkpoints, not a final destination. As a trusted advisor, Gallagher has developed this Compliance Checkpoints series to help you pursue a path through employee benefits compliance issues as part of an overall compliance plan.


The intent of this analysis is to provide you with general information. It does not necessarily fully address all your organization’s specific issues. It should not be construed as, nor is it intended to provide, legal advice. Questions regarding specific issues should be addressed by your organization’s general counsel or an attorney who specializes in this practice area.