Spousal surcharges and carve-outs are becoming more popular as employers try to implement cost-saving methods in the face of rising renewal costs. Some employers implement a spousal surcharge, which sets out to deter enrollment of spouses by imposing higher spousal premiums, while others implement a spousal carve-out that renders spouses ineligible to enroll if certain conditions are met. Both of these strategies come with compliance concerns, and employers should work closely with their own legal counsel prior to implementation.
Spousal Surcharge
A spousal surcharge aims to deter spousal enrollment in the group health plan if the spouse has access to a group health plan through their own employment. Employers may do so by increasing the premiums for tiers that cover spouses (even though this would increase premiums for all spouses, irrespective of if the spouse has access to their own coverage) or may implement an actual surcharge where a spouse who has access to other group health coverage can still enroll but will pay a surcharge on top of the regular premium for the enrollment tier.
There are no specific limits to the amount of surcharge. However, the employer cannot impose a surcharge that exceeds the actual cost of coverage. It is important that the surcharge only applies to a spouse with access to their own group health plan coverage. Employers cannot impose a surcharge on a spouse who receives coverage through Medicare or TRICARE, as those programs specifically prohibit the practice since it treats spouses differently than those who are ineligible for these programs.
Employers wishing to implement a spousal surcharge should work closely with their employment counsel to draft a policy and procedures on how to administer the surcharge. They should determine how an employee will certify the spouse's eligibility (such as using an affidavit) and what disciplinary action, if any, may be taken if an employee or spouse misrepresents the availability of other coverage. The policy should also address how midyear changes are handled if the spouse gains or loses eligibility for their own group health plan coverage.
Spousal Carve-out
A spousal carve-out, also known as a working-spouse provision or spousal exclusion, is a more drastic approach whereby a spouse who is eligible for other group health plan coverage is rendered ineligible for the employer's plan. While a spousal carve-out is allowed under ERISA, governmental and church plans that are not subject to ERISA may have their own laws to consider. Similarly, some states have marital discrimination laws that restrict the use of a carve-out by stating that spousal eligibility cannot be conditioned on whether the spouse has other coverage available. This would only apply to fully insured plans (because self-insured plans are not subject to state law by virtue of ERISA preemption) and employers should work closely with their carrier to determine which state law(s) apply to the particular plan. Employers cannot impose a carve-out on a spouse who receives coverage through Medicare or TRICARE, as those programs specifically prohibit the practice since it treats spouses differently than those who are ineligible for these programs.
If an employer implements a carve-out, plan documents would need to be amended to clearly define the eligibility provisions, and employers should ensure all enrollment materials and carrier documents are also updated. Similar to a spousal surcharge, employers wishing to implement a spousal carve-out should work closely with their employment counsel to draft a policy and procedures on how to administer the program. They should determine how an employee will certify other coverage (such as with an affidavit) and ensure that HIPAA special enrollment rights are still considered in the event a spouse loses eligibility for their own plan and needs to enroll in the employer's plan midyear. The policy should also address what disciplinary action may be taken if an employee or spouse misrepresents the availability of other coverage.
Employer Takeaway
Aside from compliance concerns mentioned above, both a spousal surcharge and a spousal carve-out can have a negative impact on employee morale, so employers should consider that impact in addition to potential cost-savings. The decision to add a surcharge or carve-out is further-reaching than just benefits compliance and should be handled closely alongside employment counsel.