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Small Business Employee Benefits and HR Blog

Employee Eligibility for Defined Contribution Health Plans

A common question from employers setting up a defined contribution health plan is about employee eligibility - what makes employees eligible for the plan?Employee eligibility for defined contribution

With a "pure" defined contribution health plan, the employer designs the plan, determines employee eligibility, and sets the healthcare allowance amounts. Employees purchase health insurance, and defined contribution software takes care of the rest.

What Determines Employee Eligibility?

Eligibility is based on how the employer sets up the plan, which varies company to company. There are two defined contribution plan design options that impact eligibility:

  1. Employee Classes
  2. Waiting Periods

If an employee meets the criteria for the employee class and satisfies the waiting period, then they are eligible and should be enrolled in the plan.

Employee Classes

With a defined contribution health plan, you can give employees different contributions based on classes of employees. Similarly, you can offer the benefit to some classes of employees and not to others.

However, the one catch is that to comply with federal regulations the classes need to be based on bona-fide business differences and you must treat all “similarly situated” employees equally. These differences may include job categories, geographic location, part-time or full-time status, etc.

For more on employee class options, see this article.

Waiting Periods

When setting up the defined contribution health plan, you set a waiting period for each class of employees (max 90 days). This is the period of time that must pass before a new employee is eligible for the benefit.

Example

ABC Manufacturing sets up a defined contribution health plan with two classes of employees:

  • Full-time managers, with a waiting period of 30 days

  • Full-time non-managers, with a waiting period of 45 days

In this example, all managers who have been employed for 30+ days are eligible for (and should be enrolled in) the plan. Similarly, all full-time non-managers who have been employed for 45+ days are eligible and should be enrolled.

What Does NOT Impact Employee Eligibility?

There are a couple of factors that do not impact employee eligibility. These include:

  • The type of health insurance employees' have purchased (ex: individual health insurance, spousal coverage, etc.)

  • Whether or not they currently have health insurance

FAQ: What About Employees Who Have Health Insurance Through a Spouse's Workplace? Are They Eligible?

Yes. As mentioned above, the type of health insurance employees purchase does not impact their eligibility in the plan. As long as the employees meet the criteria for an employee class and satisfy the waiting period, they are eligible and should be enrolled. 

Also, employees paying premiums toward a spouse's workplace plan may be reimbursed via the defined contribution health plan - as long as they are paying for an eligible premium on a post-tax basis (to avoid double-dipping).

What questions do you have about employee eligibility? Leave a question below.

 

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