Can an Employer Charge Different Rates for the Same Health Insurance Based on the Employee's Income?

Written by James Hirby and Fact Checked by The Law Dictionary Staff  

Many employers "tier" the health insurance plans, retirement accounts and fringe benefits that they offer. In other words, they offer different types of benefits to different classes of employees. In most cases, veteran and management-level employees receive especially generous employee-benefit packages. Although it's perfectly legal for employers to adhere to these "tiering" systems, many prefer to offer the same benefit choices to all of their full-time employees.

Employers that choose to offer such across-the-board benefit plans may price these benefits on a progressive scale that accounts for discrepancies in employee income. This is also perfectly legal. In fact, many human resource experts encourage major employers to engage in this practice. Studies have suggested that this arrangement boosts morale and encourages lower-earning employees to compete with one another for advancement opportunities.

There are several different ways in which a "progressive" system of benefit distribution might work. In fact, "progressive" may be a misnomer: In most cases, these systems aren't actually progressive. Instead, they demand smaller out-of-pocket contributions from high-earning veteran employees and require entry-level employees to shoulder a disproportionate amount of their health insurance costs.

This arrangement is typically framed as a reward for service. It's also used as a safeguard against high turnover rates. This is especially common among employers that operate in competitive industries. In certain economic sectors, the majority of entry-level employees leave their jobs within their first few years of employment. In order to protect against ongoing retirement or health insurance obligations, employers may require these inexperienced employees to shoulder the bulk of their insurance and retirement costs. This limits employers' outlays and reduces turnover-related financial headaches.

It's important to note that vacation benefits typically don't accrue in accordance with the rank-conscious "progressive" system. Instead, most employers award vacation benefits and sick days in proportion to employees' length of service. For instance, an employee who's logged a single year of service might be eligible for a week's worth of vacation time and three sick days. By contrast, an employee who's logged five years of service might be eligible for four weeks' worth of vacation time and 12 sick days. Although each employer is likely to follow slightly different vacation-time protocols, it's extremely rare for entry-level employees to enjoy the same amount of vacation time as their more experienced peers. In fact, the accrual of vacation time is seen as a major driver of employee performance and company loyalty.

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