First, let me be clear. NONE of this is settled yet. In years past, a law would be past with an implementation date months and often years in the future. That all ended with the fast track implementation of the ARRA, (American Restoration and Recovery Act). Remember that? COBRA coverage had to be offered retroactively from March to the preceding September ... That was far worse than the adverse selection issues of the PPACA. ARRA had to implemented within weeks of its passage and everyone was scrambling to figure out what compliance would look like even before the regulations were written. So it is with the PPACA and composite rates. So, we would like to add our take on this now to at least shape some of the debate.
Remember, most of the discussion revolving around composite rates is about taxes, avoiding them or shifting them to the "other guy". It is absolutely clear that if an employer wants to pay 100% of the premium for all employees, and deduct it as an expense, they can do that. Some have said that is subject to failing the contribution tests, but that is not likely. 100% is 100%. As long as the employer is willing to pay 100% for all without consideration of their income or age status, it is doubtful that any agency would have a leg called non-compliance to stand on.
ERISA has two tests ... dollar amount and % of ER contribution AND Pre-Tax amount of the EE contribution. You cannot pass any way except this way ...
As an example, suppose you use a composite rate for ALL employees. So, the single rate is $400 and that is a composite for all employees. It makes NO difference what the age banded rates are because the employees will never pay it.
Here's why. The ER is taking a tax deduction on the expense of the plan, not paid by employees. The ER is taking a tax deduction on the wages paid to employees which INCLUDES the deduction for their share of the premium. So, the ERISA part of the premium matters for Section 125 compliance. If Composite Rates are used, the Section 125 Plan will more easily pass the ERISA tests for most groups that not.
However, each group would have to be reviewed on a case by case basis.
When COBRA comes along, the plan would revert back to the Age-Banded Rates for that COBRA Qualifier.
All that Composite Rates do is move the group back to where we were before HCR. If Composite Rates cannot be used, then the only way to achieve compliance would be setup the EE share of the premium Post-Tax which adds another 30% to the cost of participation to the plan. The employer would then pay a fixed dollar amount toward the premium ...
Anyway you cut this, it is UGLY.