Noncontributory group insurance
Also known as: noncontributory plan, noncontributory group life insurance
Noncontributory group insurance is a group plan in which the employer pays the entire premium and employees contribute nothing. Because no employee pays, insurers require 100% of eligible employees to be covered.
Group insurance is written on a single master policy issued to an employer or association, with individual members receiving certificates of insurance rather than their own policies. A plan is noncontributory when the employer funds the whole premium, and contributory when employees pay part of it.
The participation requirement is the detail exams test most often. A noncontributory plan must cover 100% of eligible employees, because when coverage is free there is no reason for a healthy employee to decline it. A contributory plan, where employees share the cost, typically requires only about 75% participation. Both thresholds exist for the same reason: to prevent adverse selection, the tendency for a plan to attract disproportionately unhealthy members when enrollment is optional.
Funding also drives the tax treatment. An employer generally deducts group life premiums as a business expense, and the employee is not taxed on the cost of the first $50,000 of group term life coverage; the cost of coverage above that amount is imputed income to the employee. In contributory plans, the employee's own share is normally paid with after-tax dollars.
Group life and health topics appear throughout the Life and Health insurance licensing exam. Know the difference between contributory and noncontributory funding, the participation percentages attached to each, the master policy and certificate structure, and the role adverse selection plays in justifying these rules.
Key takeaways
- In a noncontributory plan the employer pays the entire premium and employees pay nothing.
- Noncontributory plans require 100% participation of eligible employees; contributory plans typically require about 75%.
- The participation rules exist to prevent adverse selection.
- Group coverage is issued under a master policy, with each covered employee receiving a certificate of insurance.