by Richard D. Weber, J.D.
MDA Legal Counsel
Published in the January 1999 issue of the Journal
Question: I am a partner in a dental professional corporation. If we provide health insurance to employees, is it true that all employees must be given the same health insurance benefits?
Answer: My partner, Curtis J. DeRoo, specializes in this field. He has provided the following answer for MDA Journal readers.
Health insurance discrimination laws depend upon whether the plan is self-insured or offered through insurance. A self-insured plan is a plan under which the employer assumes the risk of loss. A fully insured plan is a plan under which the employer pays premiums and the insurance company assumes the risk of loss.
Generally speaking, only large employers have self-insured health benefits, as only they can afford to underwrite the risk associated with any given medical condition for any given employee. Typically, a dental practice is simply not large enough to be involved in this type of insurance. A dental practice might be involved in some type of medical reimbursement coverage, such as a specified amount per employee to reimburse out-of-pocket costs such as deductibles, prescription drugs and co-pays. Such a reimbursement program would be considered self-insurance, and subject to the self-insurance rules.
Self-insurance plans are subject to strict discrimination rules. Basically, these rules are similar to pension-type coverage rules, in that nearly all employees need to be covered. The exact parameters are not discussed in this article because a self-insured dental practice would be rare. If discrimination is found under a self-insurance program, the benefits that are received are considered discriminatory and deemed to be income to the owner or the highly paid employee who receives the benefits. They are no longer tax-free health benefits, but become taxable as income.
- Insured plans. Any traditional insurance program, such as Blue Cross Blue Shield, which is administered as a group dental plan by MDA Insurance & Financial Group, would be a fully insured program. An attempt was made to place discrimination requirements on these types of plans in 1989, under Internal Revenue Code Section 89. This proposal met with significant resistance by small business and the provision was ultimately repealed before it became effective. As a result, there are no discrimination rules as long as the program is fully insured. In this instance, therefore, a dental P.C. is not required to provide the same health insurance benefits to all employees.
- Related issues. A dental practice can offer a mixture of programs, such as a fully insured program plus a medical reimbursement plan. The dental practice is not subject to discrimination under the health insurance side of the program. However, a dental practice is subject to the discrimination rules under the self-insured portion of the program, namely the medical reimbursement side.
- Cafeteria plans. A cafeteria program exists when an employee has a choice between cash and one or more benefits. A dental practice may allow an employee to choose a higher salary or a reduced salary, plus health insurance at the employer's expense. This type of option is technically a cafeteria plan, and cafeteria plans are subject to all of the discrimination rules. In short, all the employees need to be given the same choices, and legal requirements must be met. A cafeteria plan requires a written plan, election forms and separate tax returns (Form 5500).
- Health insurance deductions. If health insurance is provided through a professional corporation, it is a legitimate expense of the corporation and can be deducted, even if the granting of the insurance to some employees is "discriminatory." If health insurance is granted through a partnership, limited liability company, or a subchapter S corporation, it is subject to different rules. Under these circumstances, the partner, member or shareholder/employee deducts the health insurance on his or her individual tax return.
It used to be that the partner, member or shareholder/employer could only deduct the insurance if similar insurance was given to all employees. That rule has been abolished, so discrimination is possible even if a dental practice is a partnership, limited liability company or a subchapter S corporation.