Can we offer benefits to part-time employees, and if so, can we charge higher premiums than we charge full-time employees?

January 17, 2024

For the first question, the answer is yes, if the carrier (for fully insured benefits) or stop-loss carrier and TPA (for self-insured benefits) allow the plan sponsor to extend eligibility to part-time employees. Employers need to ensure the eligibility criteria is clearly defined, properly documented in plan documents, and communicated effectively to employees. This should include information on how part-time hours are calculated to ensure only those who are truly eligible receive an offer of coverage.

The second question about charging different premiums for part-time employees versus full-time employees is a bit more challenging. To begin, if we are discussing medical coverage and the employer is an Applicable Large Employer (ALE) subject to the ACA’s employer mandate, there are specific rules in place to identify full-time employees under the ACA, which may be different than the criteria an employer uses to identify part-time employees for benefits other than medical coverage. ALEs subject to the employer mandate must comply with those rules and offer affordable coverage or potentially face a penalty. Employers who are unsure as to whether they are considered an ALE should work with their consultant, advisor, or benefits counsel to better understand those obligations.

For employees who are not considered full-time under the ACA but are still offered medical coverage (such as those averaging 20 hours per week) or for other benefit offerings besides medical, it may be possible to charge a higher premium to part-time employees; however, there are things to consider. Employers will need to consider nondiscrimination rules, which is the idea that a plan should not favor highly compensated employees. We see these rules under both Section 105 and Section 125 of the IRC; Section 105 applies only to self-insured benefits, while Section 125 applies to pretax benefits. Generally, employers may vary benefit offerings and employer contributions based on bona fide employment classifications. Bona fide business classifications include those based on an objective business purpose (in other words, there must be a business reason for forming the classification — it can’t be formed solely to divide employees with respect to benefit offerings). Examples of allowable classifications include different geographic locations, offices, business lines, job titles, or hourly work expectations. Other examples include salaried versus hourly, part-time versus full-time, or union versus non-union. Even with a bona fide business class, the variance in employer contribution must not discriminate in favor of highly compensated employees. If highly compensated employees are being favored, then the plan is at risk for discrimination.

Employers who extend benefits eligibility to part-time employees but charge higher premiums should be aware of nondiscrimination rules and undergo testing to ensure the plan is not discriminatory based on the variance. For more information on these rules, download a copy of our Sections 105 and 125 Nondiscrimination Rules: A Guide for Employers publication.