C-Level Law

Can You Provide Different Benefits to Different Employees?

February 2, 2022

Can an employer provide different benefits to different employees? For example could it offer the C-Suite better health insurance benefits than the rank and file? Or, could it offer healthcare insurance to full-time employees but not part-time?

HIPAA prohibits health-based discrimination among “similarly situated individuals.” These factors include: health status, medical condition, claims experience, receipt of health care, medical history, genetic information, evidence of insurability, and disability. However, an employer can provide different benefits to different employees based on legitimate business reasons. For example, providing different benefits to part-time and full-time employees, employees working in different locations, employees with different lengths of service, and employees in different occupations could be appropriate.

However, providing more favorable benefits to highly-compensated or key employees, could violate the Affordable Care Act’s (“ACA”) rules concerning highly-compensated employees or other ACA non-discrimination rules. The ACA provides:

• Employers cannot look at compensation to determine health care eligibility;
• Employers cannot vary employee contributions based on years of service;
• Employers cannot have different waiting periods;
• All benefits provided to highly-compensated participants must be the same for all other participants; and
• Employers cannot approve claims for a highly-compensated employee and deny the same claim for a normal employee.

Of course, it is illegal to provide lesser benefits on the basis of race, religion, gender, age, sexual orientation, and other protected classes. That seems obvious, but employers should make sure that providing different levels of benefits does not have the appearance of causing a disproportionate effect on protected classes. For example, if a group of employees is predominantly a certain race and also receiving different benefits, it could look like discrimination. Even if it is unintentional, if the effect is to provide employees of a particular class with less favorable benefits, it could lead to a discrimination claim.

There are many reasons, such as fostering good morale, to provide the same benefits to all employees. There may be good business reasons to provide different benefits, but employers should beware of benefits discrimination claims. Before adopting a benefits plan that provides different benefits to different employees, employers should consult competent legal counsel.