Can the University of North Carolina (or some of its constituent campuses) offer a cafeteria-style flexible benefits plan that lets employees pay dependent health coverage premiums on a pre-tax basis, when state law forbids state employee benefit plans from duplicating coverage offered by the State Health Plan?

Plain-English summary

UNC General Counsel Leslie Winner asked whether the University or its constituent campuses could offer a cafeteria-style flexible benefits plan that included pre-tax payment of premiums for dependent health coverage. The AG had previously addressed a related question in an October 2001 opinion to Carl Goodwin at the Office of State Personnel and held that pre-tax dependent coverage in a flexible benefits plan would violate the non-compete restrictions in § 116-17.2 and § 143-34.1(d). Winner asked the AG to reconsider and to research the legislative rationale.

Senior Deputy AG Ann Reed and Special Deputy AG Alexander Peters reaffirmed the 2001 conclusion. The reasoning:

"Provide" means make available. UNC's argument was that "provided" in the non-compete provisions limits the restriction to benefits the State pays for. The AG rejected that reading. § 135-40(b), which establishes the Comprehensive Major Medical Plan, refers to "providing" benefits even where the employee fully funds the cost. Long-term care benefits, for example, are offered as an optional employee-funded benefit and the State pays nothing toward them, but they are nonetheless "provided" through the Plan. § 135-41(b) similarly uses "provided and made available" language. The AG cited Utilities Com. v. Edmisten (1977) for the principle that courts should not interpolate restrictions not contained in the statute, and State v. Hart (1975) for the principle that statutory constructions defeating the object of the statute should be avoided.

Legislative history confirms the anti-competition purpose. No legislative minutes directly discuss the non-compete provisions, but the AG reviewed the surrounding history. The State's flexible benefits plan was established after an Office of State Budget and Management feasibility study. Coopers and Lybrand's 1993 final report recommended a single statewide plan with central administration. Governor Hunt's Executive Order #66 (December 1994) formalized that approach. During the debate over removing the sunset provision from the NC Flex bill, the Director of the State Health Plan and the lead fiscal analyst emphasized the need for the non-compete provision. They showed that dependent coverage costs were indirectly subsidized by the surplus from employee-only claims being less than the premiums paid by the State, so the rate for dependent coverage was reduced. Siphoning younger, healthier dependents into a competing UNC pool would erode that subsidy and drive up costs for the remaining State Health Plan dependents (including retirees' families).

The structural risk. A competing UNC pre-tax dependent plan would be most attractive to UNC employees with younger, healthier families, who would have lower expected claims. Their departure from the State Health Plan pool would worsen the State Health Plan's risk pool, raising premiums for those who remained. The non-compete provisions are the legislature's protection against exactly that adverse-selection harm.

The result: UNC could not offer a cafeteria plan with pre-tax premiums for dependent health coverage. The State Health Plan retained its exclusive role.

Currency note

This opinion was issued in 2002. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. The State Health Plan has been restructured multiple times since 2002, the NCFlex program has expanded and contracted, and the federal Affordable Care Act has changed many incentives. UNC's benefits offerings have evolved. Anyone considering whether a particular UNC or state-agency benefit offering complies with the non-compete provisions should consult current statutes and recent guidance from the State Health Plan and OSHR.

Background and statutory framework

The State Health Plan as a single-pool entity. Chapter 135, Article 3 establishes the Comprehensive Major Medical Plan, NC's State Health Plan. It covers state employees and their dependents in a single statewide pool. The pool's pricing depends on the mix of risks across all members; siphoning off favorable risks raises prices for the remaining unfavorable risks.

The non-compete provisions. § 116-17.2 (UNC-specific) and § 143-34.1(d) (general state agencies) forbid any cafeteria or benefit plan from duplicating benefits provided under various articles of Chapter 135. The provisions were enacted as part of the broader push to centralize and protect the State Health Plan as it expanded its scope and risk.

Pre-tax versus post-tax dependent coverage. Federal tax law (IRC § 125) allows cafeteria plans to let employees pay benefit premiums on a pre-tax basis, reducing the employee's tax burden. A pre-tax dependent health premium is significantly cheaper to the employee than the same post-tax premium. The State could have chosen to add pre-tax dependent coverage to its NCFlex program but decided to keep dependent coverage exclusively in the State Health Plan to protect the pool.

Why "provided" had to mean "made available." UNC's reading would have limited the non-compete provisions to benefits the State pays for. But the State Health Plan includes many benefits the State does not fully fund (dependent coverage, long-term care, optional supplemental coverage). UNC's reading would have rendered the non-compete provisions toothless for most of the Plan's structure. The AG read "provide" in its natural sense of making available to ensure the statute's protective purpose worked.

Common questions

Q: Could UNC offer post-tax dependent coverage that competed with the State Health Plan?

A: The opinion specifically addresses pre-tax cafeteria-plan coverage. Post-tax coverage was not directly addressed, but the same non-compete logic would likely apply: a UNC-sponsored dependent health plan that duplicated State Health Plan dependent coverage would draw favorable risks out of the State pool regardless of the tax treatment of the premiums.

Q: Could individual UNC employees waive State Health Plan dependent coverage and buy private dependent coverage?

A: Yes. The non-compete provisions restrict what UNC can offer as an employer-sponsored plan. They do not restrict individual employees from making their own dependent-coverage arrangements with private insurers. The employees just cannot get pre-tax treatment through a UNC cafeteria plan for that private coverage.

Q: Did this opinion apply to all of UNC, or just certain campuses?

A: All of UNC. The non-compete provisions apply to the University System as a whole. The AG specifically said neither UNC nor its constituent campuses could offer the pre-tax dependent plan.

Q: What if a campus could show that its risk pool is similar to the State Health Plan's, so adverse selection would not occur?

A: The AG did not engage with empirical risk-pool arguments. The statutory non-compete is categorical: no duplication of State Health Plan benefits. Practical adverse-selection analysis would be relevant if the General Assembly chose to amend the statute, not when applying it as written.

Citations

Statutes:
- N.C.G.S. § 116-17.2 (UNC non-compete provision)
- N.C.G.S. § 143-34.1(d) (general state agency non-compete provision)
- N.C.G.S. Chapter 135 (state retirement and health benefits)
- N.C.G.S. § 135-40 (Comprehensive Major Medical Plan)
- N.C.G.S. § 135-40(b) (undertaking section)
- N.C.G.S. § 135-41(b) (benefits provided and made available)

Cases:
- State ex. rel Utilities Com. v. Edmisten, 291 N.C. 451, 232 S.E.2d 184 (1977) (no interpolating restrictions not in statute)
- State v. Hart, 287 N.C. 76, 213 S.E.2d 291 (1975) (avoid statutory construction defeating object)

Source

• Landing page: https://ncdoj.gov/opinions/ability-of-the-university-system-to-offer-dependent-health-coverage/

Original opinion text

REPLY TO ANN REED
STATE AGENCIES
TEL: (919) 716-6800
FAX: (919) 716-6755
TTY: (919) 716-6430

March 26, 2002

Leslie Winner
Vice President and General Counsel
University of North Carolina
Post Office Box 2688
Chapel Hill, North Carolina 27515

Re: Advisory Opinion; N.C. Gen. Stat. § 116-17.2 and § 143-34.1(d); ability of the University System to offer dependant health coverage

Dear Leslie:

This letter is in response to your inquiry in which you ask whether the University, or some of its campuses, may offer a cafeteria plan which allows pre-tax premiums for dependent health coverage. You ask that we review this issue in light of our opinion to Carl Goodwin of the Office of State Personnel dated October 3, 2001, which discusses whether a pre-tax dependent health coverage plan violates the non-compete mandate of N.C. Gen. Stat. § 116-17.2 and § 143-34.1(d). You also asked that we research the legislative rationale for this noncompete restriction.

As you are aware, in our opinion to Mr. Goodwin we opined that a flexible benefit plan "cannot offer a plan that duplicates benefits offered to employees by the State Health Plan." We went on to indicate that Mr. Goodwin's inquiry raised the issue of whether dependent health care benefits are subject to the non-compete restrictions set out in N.C. Gen. Stat. § 116-17.2 and § 143-34.1(d). We indicated that in our opinion they are.

In interpreting the non-compete restrictions contained in N.C. Gen. Stat. § 116-17.2 and § 143-34.1(d), we focused on the prohibition against a cafeteria plan including those benefits provided to employees under various Articles of Chapter 135, including Article 3 of that chapter, which covers providing employee and family healthcare coverage. It has been suggested that the word "provided" limits the non-compete restrictions to those benefits which the State pays for. We disagree. We believe it is clear from the language of the statutes that the word "provide" means making the benefit available to the employee. The benefit is provided under the Comprehensive Major Medical Plan even when the employee fully funds the cost of the benefit. G.S. § 135-40(b), the undertaking section for the Major Medical Plan, also refers to "providing" benefits for the State's employees and certain of their dependants, and it is clear the State does not pay for all of the benefits. For example, long-term care benefits are authorized as an optional program for qualified employees, retired employees and their dependants. The State pays nothing towards these costs. Nonetheless, G.S. § 135-41(b) refers to benefits provided and made available through the Plan. Established case law counsels us not to interpolate or superimpose restrictions not contained in a statute on the statute. State ex. rel Utilities Com. v. Edmisten, 291 N.C. 451, 232 S.E.2d 184 (1977). Interpreting "provide" to mean "make available on a fully funded basis" is a restriction not contained in the statute. Additionally, a construction of a statute which operates to defeat or impair the object of the statute must be avoided if that can reasonably be done. State v. Hart, 287 N.C. 76, 213 S.E.2d 291 (1975). Our review of the legislative interactions surrounding the non-compete provisions of G.S. § 143-34.1(d) supports the conclusion that a cafeteria plan for the University or some of its constituent campuses that allows pre-tax premiums for dependant health coverage impairs the object of the statute.

In the course of researching the origins and legislative history of these statutes, we did not locate any legislative minutes directly discussing the non-compete restrictions. However, in reviewing the events surrounding the establishment of the State's flexible benefits plan we did discover documents which we believe are relevant. As you are aware, the initial responsibility for studying the feasibility of establishing and maintaining a flexible benefits plan for State employees was assigned to the Office of State Budget and Management. The Office of State Budget contracted with the accounting firm of Coopers and Lybrand to provide recommendations concerning structure and plan design. Coopers and Lybrand's final report, issued August 20, 1993, recommended a single statewide plan encompassing all employees and utilizing a central administration. The Office of State Budget moved forward with this design concept, and the Governor formalized the statewide, centrally-administered coordination effort with Executive Order #66, issued December 5, 1994.

During the debate over removing the sunset provision from the NC Flex bill, the Director of the State Health Plan and the lead fiscal analyst staffing the legislative committee to which the bill was assigned emphasized the need for the non-compete provision. Additionally, they produced figures which showed that the dependent coverage cost is indirectly subsidized by the amount saved on the employee — only claims. Since the employee-only claims paid are less than the premiums paid by the State, the rate for dependent coverage is reduced by the surplus. Furthermore, siphoning off younger, healthier dependents from the pool that includes retirees and their dependents would almost certainly drive up the cost of dependent coverage. As we previously stated, and as the legislative interactions confirm, this is precisely the type of competition the General Assembly intended to prohibit. Accordingly, based on the clear language of N.C. Gen. Stat. § 116-17.2 and § 143-34.1(d) and our research into their history, we conclude that the University, or some of its constituent campuses, cannot offer a cafeteria plan that allows pre-tax premiums for dependent health coverage. This competition would impair the object of the statute, which was to establish a single statewide plan that did not compete with existing benefits.

We trust this information has been helpful and answers your inquiry. Do not hesitate to contact us if you have any additional questions.

Very truly yours,

Ann Reed
Senior Deputy Attorney General

Alexander McC. Peters
Special Deputy Attorney General