Tech & Work

Different benefits for different categories of employees

You generally do not have to provide the exact same benefits to all employees, but you do have to offer the benefits on a nondiscriminatory basis.

By Robin Thomas, J.D.

Many employers mistakenly think that you must offer the same benefits to all of your employees.  However, as a general rule, you have a lot of discretion to set the eligibility requirements for employment benefits, as long as you offer them on a nondiscriminatory basis and abide by federal and state regulations.  The phrase "on a nondiscriminatory basis" refers to discrimination under both equal employment opportunity and tax laws.

Nondiscrimination and EEO laws

Equal employment opportunity (EEO) laws (such as Title VII of the Civil Rights Act, the Pregnancy Discrimination Act, the Americans with Disabilities Act, and the Age Discrimination in Employment Act) do not require employers to offer the same benefits to all employees.  Rather, they mandate that you may not discriminate against employees protected under these laws by excluding the covered groups from benefits offered to other similarly situated employees. 

Thus, as an obvious example, if you offered paid health insurance only to male employees, that policy would illegally discriminate against female employees.  On the other hand, if the benefits offered are based on the category of employment as opposed to personal characteristics, that distinction generally will not be considered discriminatory.  For example, if you provide an additional week of vacation to management but not to nonexempt employees, that policy is allowed because it distinguishes employees based on job duties and status.

Nondiscrimination and tax law

Nondiscrimination has a different meaning under federal tax law.  Benefits, such as health insurance and welfare and pension plans, generally are governed by the Internal Revenue Code (IRC) and must be offered on a "nondiscriminatory" basis in order for the benefits to be treated as nontaxable income to the participants.  Certain welfare plans (including self-insured medical and group term life insurance plans) will create taxable income to highly compensated or key personnel if those employees receive a disproportionate amount of tax-advantaged benefits. 

In other words, plans that "discriminate" in favor of highly compensated employees may result in all or a portion of the benefits being treated as taxable income to those employees.  Therefore, the IRC, as a condition for favorable tax treatment of benefits, requires certain plans to contain minimum eligibility provisions allowing for broad employee participation. 

Nondiscriminatory eligibility requirements 

One example of a clearly nondiscriminatory basis for benefits eligibility is to require a set period of service.  Required service periods may be as short as a few weeks or months (typically for paid days off and health insurance) or as long as a full year or more (for participation in pension plans).  You also may decide to exclude employee dependents, spouses, or domestic partners from coverage in order to control costs and simplify administration.  Some organizations postpone benefits eligibility for new employees for a certain amount of time, such as 90 days from date of hire.  However, others elect to give new employees benefits immediately as a recruitment incentive.        

Another nondiscriminatory criterion is to offer benefits only to full-time employees or to part-time employees who work a minimum number of hours.  As the use of regular part-time employees increases, the trend is to provide them with a pro rata share of benefits such as vacation, sick leave, and other paid absences, based on the number of hours worked.  It is less common for part-time employees to receive health insurance benefits, and temporary employees (employees who typically work for a specific, limited period of time) often are not eligible for any benefits. 

Some benefits required by law

Of course, federal or state law may require the participation of workers in certain types of benefits.  For example, statutorily mandated employment benefits include workers' compensation, unemployment compensation, family and medical leave, and military leave.  So, you obviously need to make sure these are properly taken care of.  For the rest, the main point to remember is that you do not necessarily have to give the same benefits to everyone in order to comply with the nondiscrimination rules.

Robin Thomas, J.D., is Managing Editor for Personnel Policy Service, Inc., 159 St. Matthews Avenue, Suite 5, Louisville, KY 40207, and can be reached at editor@ppspublishers.com, or 1-800-437-3735.  Personnel Policy Service markets group legal benefit services and publishes HR information products, including the Personnel Policy Manual and HR Matters newsletter. This article is not intended as legal advice.

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