We are a small group with age-banded rates imposed by our insurance carrier. Can we create and utilize a composite rate for our employees?

We do not recommend that employers create composite rates where the carrier is billing on an age-banded basis. This is because it can result in issues under ERISA and the Age in Employment Discrimination Act (ADEA).

Specifically, it is a violation of ERISA if the employer rate for some employees is higher than the insurer rate for those employees. Additionally, if the employer calculates its own composite rates, it becomes unworkable if new employees are hired or if employees present when the rates were set to terminate or retire. Essentially, if the client hires a new employee (or an employee is dropped from coverage), the average rate per employee would be affected (i.e., the employer will have to calculate a new composite rate based on the newly hired or fired employee). In other words, the insurer would be billing for a higher or lower total premium, and the employer’s calculated composite rate may not match the premium charged by the insurer.

This scenario is further augmented by the dependent tiers since even though an insurer could calculate composite rates for dependents, the employer composite rate for dependents may not accurately reflect the actual amount charged by the insurer. With or without the dependent tier structure, this would cause the employer to over or undercharge plan participants and would be viewed as a violation of their ERISA fiduciary duty. Conversely, where the insurer creates a composite rate, they are required to maintain that composite rate throughout the year regardless of the change in the employer’s employee demographic changes.

The other possible issue with an employer setting their own composite rates is the ADEA, which prohibits employers from discriminating against employees aged 40 and older

For a plan that is community rated with individual rates, the employer has two choices if they want to stay in compliance with the ADEA:

1. Contribute a percentage of the premium charged by the insurer (i.e., a percentage based on the individual rates received from the insurer); or
2. Implement a fixed dollar contribution amount for employees’ payroll deduction (and the employer would absorb the rest).

If the employer structures the employee contribution in any other way, including a set employer contribution, the result will violate the ADEA.

So, setting composite rates when the insurance carrier passes on age-banded rates could cause employers to violate both ERISA and the ADEA. Employers should consult with legal counsel if this is an issue they need to remedy.