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Small Business Employee Benefits and HR Blog

The Power of Defined Contribution Employee Classes

Taking care of employees is one of the major reasons companies offer health benefits - from major global corporations to the newest small business. Another primary reason is recruiting and retaining great employees. Getting the best people requires you give them great compensation. The company's health benefit plan is a key part of the compensation you offer employees. One way companies use their defined contribution health plan to recruit and retain the best employees with is with employee classes.defined_contribution_employee_classes

Using Employee Classes Makes Business Sense

With salary and other types of compensation, employers routinely compensate groups of employees differently. Field sales reps are compensated differently than sales managers. Some employees get company cars, while others earn quarterly bonuses.

Because health benefits are such an important part of compensation, why not provide benefits that vary by class of employee?

Using a defined contribution health plan, companies can create employee classes to offer benefits tailored to their company's objectives, transforming the health benefit plan into a tool to find and keep great people.

To illustrate how using classes does this, consider a startup technology company who struggled to hire and keep senior programmers in a very tight labor market. Instead of offering the same health plan to all employees, the company created separate classes for senior and junior programmers and gave senior programmers $350 more per month in their defined contribution allowances. This large increase helps the company reduce attrition among senior programmers. Plus, it creates a visible incentive for junior programmers to advance and grow with the company.

Providing Class-Specific Health Benefits is Clearly Allowed by ERISA and HIPAA

Providing different levels of benefits to classes of employees is at the core of benefits compensation and is routinely done by major corporations. Federal regulations state that "a plan or issuer may treat participants as two or more distinct groups of similarly situated individuals if the distinction between or among the groups of participants is based on a bona-fide employment-based classification consistent with the employer's usual business practices."

To comply with these regulations, employee classes within the defined contribution health plan (usually set up with a Section 105 Plan) must:

  • Be based on bona-fide business differences. These may include job categories, geographic location, part-time or full-time status, etc.

  • Treat all "similarly situated" employees equally. By creating classes based on genuine job categories, all employees within a class will be "similarly situated".

  • Not discriminate against unhealthy people. An employer cannot provide inferior benefits to specific individuals with adverse health conditions. 

  • Spell out the requirements for classes and benefits in the ERISA plan document.

If, upon audit, a plan is found to not comply with these rules, then the employer must provide the same level of benefits to all employees, regardless of their class, from the time the plan was created to the date of the violation.

See 29 CFR §2590.702 for more information.

Do you have questions about employee classes with defined contribution health plans? Leave a comment below.

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