» All About Spousal Surcharges & Carve-Outs
March 7, 2023
ACA, Benefits Administration, Business Strategies, Compliance, Employee Benefits, Health Insurance
We look at a number of strategies to help employers lower their health insurance costs. One of these are Spousal Surcharges and Spousal Carve-outs. Let’s explore each of these in greater detail and as always, you can schedule a complimentary call with an advisor to discuss these in greater detail.
A Spousal Surcharge increases the employee contribution to enroll spouses on the health plan, while a Spousal Carve-out restricts spouses’ eligibility for the plan, or more drastically, completely excludes them from the plan. As a result of these strategies, employers pay less in premiums (or claims for self-funded plans) than they would have if the spouses were enrolled.
Since insurance laws vary by state, employers should always consider the various federal and state law implications of the specific eligibility strategy they want to implement.
Restricting Spousal Eligibility
Employers may not want to take the extreme stance of excluding spouses from the plan and may instead restrict their eligibility. This is the Spouseal Carve-out plan provision, whereby the plan excludes or restricts spouses from enrolling in the group health plan when they are eligible for or enrolled in their own employer’s health plan.
The Spousal Surcharge raises employee contributions instead of limiting eligibility when the spouse is eligible for their employer’s health plan, still with the goal of reducing spousal enrollment in the health plan.
Keeping Compliance in Mind
As with any benefits strategy and decision, employers must weigh the legal implications for their plan and understand potential risks.
ACA Pay or Play Rules: The ACA’s employer mandate does not require employers to offer coverage to spouses. In fact, these provisions can be beneficial for spouses, as they render them ineligible and thus potentially eligible for a subsidy through the Exchange.
ACA Reporting: When completing Form 1095-C, employers must use the correct codes to indicate the employee’s spouse received a conditional offer of coverage (Code 1J for plans that do not offer coverage to non-spouse dependents or Code 1K for plans that do offer coverage to non-spouse dependents).
ACA Grandfathered Plan: A spousal surcharge may cause a health plan to lose its grandfathered plan status. Weigh this decision – many grandfathered health plans are impossible to recreate with today’s ACA plans.
State Laws: State laws prohibiting discrimination based on marital status or sex may pose an obstacle, besides state las that specifically require spousal coverage. Keep in mind that self-funded plans are subject to ERISA, which preempts state laws, so an ERISA plan may exclude a spouse even if the state law requires it.
Medicare Secondary Payer (MSP) Rules: Eligibility restrictions should apply equally to all participants. For example, excluding Medicare-eligible spouses may violate the MSP rules.
HIPAA Special Enrollment: If the spousal carve-out causes a spouse to become ineligible, the loss of coverage will trigger a HIPAA special enrollment and the spouse can enroll mid-year in their employer’s coverage. However, this does not apply to a new spousal surcharge, only a carve-out.
Section 125 Rules: Employers must take care that any changes to their plan provisions don’t cause their plan to run afoul of Section 125 non-discrimination rules, which prevent employers from favoring highly compensated employees.
COBRA: While the loss of coverage is a qualifying event under HIPAA special enrollment rules, the loss of eligibility due to a plan change is not a COBRA qualifying event for a spouse. Employers must take care to not offer COBRA in this situation, as an insurance carrier or stop-loss provider will not provide coverage.
Plan Documents & Summary Plan Descriptions (SPDs): As with any other plan change, employers must take care to update their plan documents and SPDs to reflect the new rules clearly to employees. They should also include any verification procedures and potential consequences for full transparency.
General Considerations Beyond Compliance
Employee Perception: This is always one of the biggest risks for employers in making any change that can be perceived by employees as a benefit being taken away from them. Adding a surcharge raises fairness issues and could challenge a “family-first” culture.
Eligibility Verification: How will the employer verify eligibility status or when to add the surcharge? Will this be an attestation form or documentation from the spouse’s employer? What will be the penalty for any employee that is untruthful or late with the form? Is it required every year?
Exceptions: What exceptions will the employer make to the new rule, say, part-time workers, unaffordable spousal coverage, or a comparably worse plan?
Definition of Spouse: Will the new rules apply to domestic partners, civil union partners, common-law partners, surviving spouses, or others? What if the spouse also works for the same employer?
Collective Bargaining Agreements or other contractual obligations: Does an existing collective bargaining agreement create potential conflicts if there is a change to spouse eligibility or employee contributions?
Insurance Carrier Rates: Spousal surcharges and eligibility restrictions may cause the medical plan insurer to change their underwriting assumptions and change plan rates. Employers and brokers should always inform carriers before changing their plan rules.
Health insurance costs are rising to unsustainable levels and employers are looking for relief. While employers may consider lowering their plan costs through a Spousal Surcharge or Spousal Carve-out Provision, they should work with their advisor, legal counsel, and tax advisor for more detailed analysis of the impact to their health plan.
To discuss these strategies and your own plan, click here to schedule a quick call with one of our advisors.
Posted by John Hansbrough in ACA, Benefits Administration, Business Strategies, Compliance, Employee Benefits, Health Insurance