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socrateaser
socrateaser, Lawyer
Category: California Employment Law
Satisfied Customers: 38879
Experience:  Retired (mostly)
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I am a 14 year veteran at my company. When I was hired, one

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I am a 14 year veteran at my company. When I was hired, one of the employment benefits was that my employer paid 100% of my medical premiums. This year, my employer informed me that this practice was not in compliance with ERISA regulations and would therefore have to rescind that benefit. When questioned, they were unable to identify an actual regulation. This sounds fishy to me. Are they right, or do I need to propose a renegotiation with regard to benefits? Thanks in advance!
ERISA contains provisions for nondiscriminatory application of health care benefits (29 U.S.C. 1181, 1182, 1183). There is nothing, however, that prohibits an employer from paying 100% of employee benefits. Whereas, the Internal Revenue Code has provisions that prohibit discriminating in favor of highly-compensated employees (26 U.S.C. 105(h)). So, it could be that the employer wants to implement a plan that requires the average employee to pay a greater portion of the insurance cost, and this may negatively impact the ability to maintain paying you at 100%.

Hope this helps.

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Customer: replied 5 years ago.
To Socrateaser

Thank you for the response. I'm a little confused. My employer does not increase the premiums of other staff to allow this benefit for me and those like me. I guess the real question is what does my employer have to do to be allowed to continue to provide this benefit without concern that their somehow running afoul of the law?

Thanks in advance for your help!
Cutting to the chase, the only way to avoid the problem with a highly-compensated employee is for the employer to increase the employee's total compensation by the amount that would be necessary for the employee to pay the added taxes on the cost of the health insurance that must be included in gross income.

For example:

Your health care plan costs $500 per month. The employer agrees to pay the entire cost, but other employees must make a $100 per month copay. You are a highly-compensated employee, therefore this violates IRC 105(b) and the $500 X 12 = $6,000 must be included in your gross W-2 income for the tax year. The marginal tax rate for federal and state income tax in your circumstances is 35% federal and 9.3% state = 44.3%. $6,000 X .44.3 = $2,658 income taxes, so your employer must add another $3,344 to your gross income to make up for the increase in your wages created by the violation of IRC 105(b).

Note: The amount that must be added to your income is greater than what the marginal tax rate suggests, because every increased dollar of income adds additional taxes; the actual formula is: annual_heathcare_cost * exp(marginal_federal_rate + marginal_state_rate).

Hope this helps.

NOTICE: My goal here is to educate others about the law. I am always available to answer your follow-up questions after you click Accept – however, if you do not click Accept, the website gets paid, and I receive nothing. This is true, even if you are on a subscription plan. So please click Accept, so that I will be able to continue to provide this service for others in the future.


And, if you need to contact me again, please put my user id on the title line of your question (“To Socrateaser”), and the system will send me an alert. Thanks!


socrateaser and other California Employment Law Specialists are ready to help you
Customer: replied 5 years ago.
Ok thank you very much :)

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