Question: For annual enrollment this year, we would like to introduce a new HDHP with an HSA and then encourage our employees to move to that plan by offering a critical illness product. Our employees would also have the option to remain on the PPO plan but will not be offered this additional illness coverage. Can we do that?
Answer: First, it is best to work with your insurance broker regarding your strategy for benefit plan changes, as they are your best resource for finding the best products to meet your needs while ensuring compliance with the relevant benefits regulations. What follows below is general information, not tax or legal advice, regarding your high deductible health plan (HDHP), health savings account (HSA), and critical illness plan question:
- Group health plans that are self-funded by an employer are subject to certain nondiscrimination rules under § 105(h) of the Internal Revenue Code; however, those provisions do not apply to insured plans or “critical illness” products.
- Cafeteria plans, which enable employees to elect to make coverage contributions (payroll deductions) on a pretax basis, are subject to certain nondiscrimination rules under Internal Revenue Code § 125. Those rules do not prohibit offering different plan options to different employees, but instead are designed to prevent highly-compensated employees or key employees from benefitting disproportionately from the plan in comparison to other employees. The typical “critical illness product” is paid for either by the employer or by the employee with after-tax payroll deductions (or by both), so it is not part of the employer’s cafeteria plan. However, even if offered through the cafeteria plan allowing employees to make pretax premium payments, the § 125 nondiscrimination rules should not be an obstacle since the product will be offered to all employees (regardless of compensation or job level) electing the HDHP group health plan.
On a separate matter, note that employees may contribute to a HSA, or have employer contributions made on their behalf, only if they are covered by a HDHP and do not have any disqualifying health coverage. A “critical illness product” typically is not disqualifying health coverage under the HSA rules, provided that the policy’s coverage pays a specific dollar amount when the policy is triggered, or pays a fixed amount per day (or per period of hospitalization). In other words, the policy’s coverage is not based on reimbursing the cost of any health care services.
Please consult with your benefits broker or benefits legal counsel for more details relating to your benefit plans.
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