Understanding Federal Nondiscrimination Laws for Group Health Benefits (2026 Update)

Federal law governs discrimination in employee benefit plans through several distinct sets of rules. Retirement plans follow their own framework, and group health and welfare benefits fall under a separate set of nondiscrimination standards that employers need to understand to stay compliant.

This guide covers what’s permitted, what’s restricted, and how to stay compliant with the three federal laws that govern group health nondiscrimination: ERISA, HIPAA, and the Internal Revenue Code.

Key Terms Employers Should Know

ERISA: Employee Retirement Income Security Act

Enacted in 1974, ERISA sets minimum standards for employee benefit plans offered by private employers, including health and welfare benefit plans. ERISA also prohibits discriminatory or retaliatory practices that interfere with benefit rights.

HIPAA: Health Insurance Portability and Accountability Act

Passed in 1996, HIPAA includes nondiscrimination rules that prohibit group health plans from denying eligibility or charging different premiums based on health status, medical conditions, or history, subject to specific regulatory exceptions such as compliant wellness program rules.

ERISA: Protecting Health Benefit Rights

Under Section 510 of ERISA, employers may not interfere with an employee’s right to participate in a benefit plan. Prohibited actions include:

  • Terminating an employee because they have high-cost medical claims
  • Reducing an employee’s hours to make them ineligible for coverage
  • Disciplining or firing someone for using health benefits
  • Retaliating against employees who provide testimony in an ERISA-related proceeding

ERISA leaves the decision to offer health benefits up to the employer. Employers who choose to offer them take on the responsibility of avoiding adverse employment action that would prevent someone from obtaining benefits or exercising their rights.

HIPAA: Nondiscrimination Based on Health Factors

HIPAA bars group health plans from discriminating against individuals based on health status-related factors. These rules generally apply within groups of “similarly situated individuals,” meaning a plan can use bona fide employment-based classifications, and it must treat people consistently within a classification regardless of health factors.

What Employers Can Do

  • Change carriers or plan designs, for example switching to an HMO
  • Increase deductibles or copays, as long as changes apply consistently to the covered group, as part of a broader cost sharing or cost containment strategy
  • Apply uniform plan rules regardless of medical conditions, including when structuring contributions across different employee classes
  • Offer compliant wellness program incentives, when the program is made available to all similarly situated individuals and required accommodations are provided, such as a data-driven wellness program

What Employers Cannot Do

  • Deny or restrict eligibility based on an employee’s illness or expected healthcare costs
  • Charge a higher premium to an individual because of claims history or medical condition, within a similarly situated group
  • Terminate or pressure an employee to drop coverage due to expensive medical needs
  • Reduce hours or target employees for employment actions based solely on health status

These protections hold during layoffs and restructuring as much as they do during normal operations, so cost-cutting decisions still need to steer clear of targeting employees based on health conditions.

Internal Revenue Code: Nondiscrimination in Tax-Advantaged Plans

Group health plans that are self-funded, or offered through pre-tax payroll arrangements, can trigger additional IRS nondiscrimination rules. Different rules apply depending on how the benefit is funded and how employees pay for it.

Self-Funded Plans and Section 105(h)

Self-funded plans are tested under Code Section 105(h), which is designed to prevent self-funded plans from favoring Highly Compensated Individuals (HCIs) in eligibility or benefits. Employers weighing whether self-funding is the right fit can review Level Funded vs. Self Funded vs. Captive: What’s the Difference? to compare funding models before nondiscrimination testing becomes a factor.

Cafeteria Plans and Section 125

Section 125 cafeteria plans, used when employees pay for benefits pre-tax, must satisfy their own nondiscrimination requirements to keep pre-tax benefit access from disproportionately favoring Highly Compensated Employees (HCEs) or key employees. Administering these elections is often part of a broader HRIS setup.

HCI and HCE sound alike and apply to different tests with different definitions. Mixing them up is one of the more common compliance mistakes employers run into. A full breakdown of where each term applies and why it matters is covered in the companion piece, HCE vs. HCI: Why Employers Keep Mixing Up These Two Nondiscrimination Tests.

Key Takeaways for Employers

  • ERISA protects employees from retaliation or interference related to benefit rights
  • HIPAA prohibits eligibility and premium discrimination based on health status-related factors among similarly situated individuals, with limited exceptions such as compliant wellness programs
  • IRS nondiscrimination rules apply differently depending on whether the medical plan is self-funded (Section 105(h), HCIs) or offered through a cafeteria plan (Section 125, HCEs)
  • Design changes are allowed when applied consistently, without targeting individuals based on health status
  • Discrimination based on high claims, chronic illness, or perceived cost to the plan is prohibited

Staying Ahead of Compliance in 2026

Nondiscrimination compliance sits at the center of how group health plans stay both compliant and effective. Reviewing plan design ahead of each renewal, tracking updates to compensation thresholds, and coordinating eligibility rules across HR and benefits functions all keep a plan positioned to meet federal requirements while continuing to serve employees well. Employers looking for a deeper look at plan design options can also explore Employee Benefits services built specifically for mid-market organizations preparing for their next renewal cycle.

Frequently Asked Questions

What’s the difference between ERISA and HIPAA nondiscrimination rules?
ERISA protects an employee’s right to participate in a benefit plan without retaliation or interference. HIPAA addresses a related but separate issue, preventing group health plans from charging different premiums or denying eligibility based on an individual’s health status. The two laws work together to cover different types of risk.

Do these nondiscrimination rules apply to fully insured plans?
ERISA and HIPAA nondiscrimination protections apply broadly to group health plans, including fully insured ones. Section 105(h) self-funded testing and Section 125 cafeteria plan testing apply specifically based on how the plan is funded or how employees pay for coverage.

What happens if a self-funded plan fails Section 105(h) testing?
A plan that fails 105(h) testing can trigger additional taxable income for the highly compensated individuals who benefited disproportionately, which creates a tax and compliance issue best caught during a plan design review.

Can an employer offer richer benefits to executives?
Employers have real flexibility in plan design, including how they structure contributions across employee classes, and that flexibility has to be applied consistently across the workforce through a self-funded or cafeteria plan without specifically favoring highly compensated individuals or employees.

How often should employers review nondiscrimination compliance?
Reviewing compliance before each plan year renewal, and any time there’s a significant change to plan funding, eligibility rules, or contribution structure, keeps a plan current. Thresholds like the HCE compensation limit are adjusted periodically, so a plan review from last year should be revisited this year.

Smart Benefit Plans Meet Guidelines, Employee Needs, and Employer Cost-Containment Goals

If you’re offering group health benefits, nondiscrimination compliance isn’t optional, it’s federal law. Flexibility in plan design is permitted, but those choices must be made fairly and applied consistently across the workforce.

Need help reviewing your health benefit design for 2026? Parker Insurance works with mid-market employers to build plans that stay compliant and continue working for employers and employees as thresholds and plan designs evolve.