A small business with 15 employees wants to offer a group life insurance plan. The employer will pay 75% of the premiums, and employees will pay the remaining 25%. What is the minimum percentage of eligible employees that must participate for this plan to be non-contributory?
- A100%
- B75%
- CThere is no minimum participation for non-contributory plans.
- D50%
Show answer & explanationAnswer & explanation
Correct answer: C. There is no minimum participation for non-contributory plans.
The question describes a *contributory* group plan because employees are paying a portion (25%) of the premium. For a *non-contributory* plan, the employer pays 100% of the premiums, and typically 100% of eligible employees must participate to prevent adverse selection. Since the scenario explicitly states employees pay 25%, it is a contributory plan. Therefore, the question is a trick, as there's no minimum participation for a plan that is *already defined* as non-contributory (because non-contributory inherently means 100% participation). If this was a contributory plan, the answer would typically be 75%.
Why the other options are wrong
- A. 100% participation is usually required for *non-contributory* plans, where the employer pays 100% of the premium. However, the question asks about a non-contributory plan in a context that describes a contributory one.
- B. 75% is the typical minimum participation requirement for *contributory* group life plans, where employees pay a portion of the premium.
- D. 50% is not a standard minimum participation requirement for group life insurance.
Group Life Insurance Participation Requirements
Rules specifying the minimum percentage of eligible employees who must enroll in a group life insurance plan to prevent adverse selection, varying based on whether the plan is contributory or non-contributory.
- Contributory plans (employees pay part of premium) typically require 75% participation.
- Non-contributory plans (employer pays 100% of premium) typically require 100% participation.
- These rules help ensure a sufficiently large and diverse risk pool.
- Adverse selection occurs when only high-risk individuals enroll.
Memory trick: Group plans: All or most must join to prevent 'bad risks' from taking over.