Let's start by clarifying: there is a significant difference between a spousal/dependent surcharge and a spousal/dependent exclusion or carve out.
Spousal / Dependent Surcharge vs Spousal / Dependent Carve Out
A spousal or dependent surcharge involves charging an additional amount to an employee’s premium in order to cover a spouse or dependent child that has access to other group coverage (not individual coverage), such as from their own employer. For example, an employer deciding to charge an extra $100 per month to any employee who covers his or her spouse under their medical plan. Note, this can only happen if the spouse or dependent is eligible for coverage under their own employer’s health plan but declines to take it. If the spouse or dependent is not eligible for another employer health plan, the spousal/dependent surcharge (an extra $100) wouldn’t be imposed at all.
In contrast, an outright spousal carve out (AKA dependent exclusion) for those who have access to other group coverage would make the spouse or dependent ineligible for coverage. Employers occasionally use this to control how many dependents or spouses that their health insurance extends to, but it’s not without its perils. This design might violate insurance law in some states for fully-insured plans, as well as ACA’s employer mandate for applicable large employers.
Complications with Spousal Surcharges
The main concerns when implementing a spousal surcharge (i.e., charging a higher premium for a spouse that has access to health insurance through their own employer but has declined or been excluded for whatever reason) include the following:
1. State Law Considerations
First, if the plan is fully-insured, the employer must consider state law. For example, the Texas insurance code requires coverage for spouses and dependent children. The below are references to Texas law, accurate as of this post’s writing:
Sec. 1501.152. EXCLUSION OF ELIGIBLE EMPLOYEE OR DEPENDENT PROHIBITED. A small employer health benefit plan issuer may not exclude an eligible employee or dependent, including a late enrollee, who would otherwise be covered under a small employer group.
Sec. 1501.603. EXCLUSION OF ELIGIBLE EMPLOYEE OR DEPENDENT PROHIBITED. A large employer health benefit plan issuer may not exclude an employee who meets the participation criteria or an eligible dependent, including a late enrollee, who would otherwise be covered under a large employer group.
A “dependent” under the Texas Insurance Code includes (not exhaustive):
a spouse;
a child younger than 25 years of age, including a newborn child;
a child of any age who is:
(i) medically certified as disabled; and
(ii) dependent on the parent;
While it’s clear that a health plan could not exclude coverage for spouses or dependents who are otherwise eligible to enroll, this does not seem to prevent a surcharge for spouses or dependents who have access to other group coverage, as long as they remain eligible under the plan. That said, it is best to notify the carrier before implementing this type of surcharge as this may change underwriting assumptions.
2. ERISA Plan Document and Summary Plan Document
If a surcharge is implemented, the Plan Document and Summary Plan Document (SPD) will need to be amended to include the spousal or dependent surcharge. In addition, all enrollment materials should clearly communicate this information to avoid any confusion or errors.
3. The ACA’s Employer Mandate
The ACA comes with an employer mandate for all Applicable Large Employers (ALEs), defined as employers with 50 or more full-time employees, and/or full-time equivalents (FTEs). Under this ruleset, group health plans are required to be available for dependent children up to age 26. The employer mandate provisions also generally require that ALEs make qualifying coverage available to all full-time employees and their dependents to avoid a penalty. However, this does not necessarily mean that they couldn’t impose a surcharge for those who have access to other employer-sponsored coverage if the dependent child remains eligible to enroll.
In addition, the employer mandate requirement applies only to employees and certain dependent children—not an employee's spouse. The requirement that coverage be “affordable” looks at only the cost of employee-only coverage. Thus, a spousal surcharge would not create compliance concerns under the employer mandate. As long as the coverage is available to dependent children up to age 26, a surcharge doesn’t appear to violate the ACA or employer mandate because the offer of coverage is there—it just costs more if a dependent has access to other group coverage.
4. Enforcement of Spousal Surcharge Policy
In the case of any fraud or misrepresentation, the employer will need to decide what action to take against employees. The employer should consider stating explicitly on the enrollment form that any misrepresentations made on the form could lead to cancellation of coverage (including, for example, retroactive cancellation and a related recouping of previously paid premiums and benefits). The medical plan could probably retroactively terminate an employee’s coverage, and that of the spouse, if the plan determines that a participant engaged in fraud.
5. Possible Discrimination with Spousal Surcharges
Spousal surcharges are typically designed to apply uniformly to all plan participants. Even if a spousal surcharge is neutral on its face, it may discriminate in favor of highly compensated participants in practice. For example, a surcharge imposed or waived in a manner that favors certain highly-comped individuals. For this reason, plan sponsors must consider potential nondiscrimination implications when designing any spousal surcharge.
Why do Employers Implement Spousal Surcharges?
With so many considerations under the ACA, you may wonder why employers would grapple with Spousal Surcharges at all. Here are a few quick reasons:
Implementing a Spousal Surcharge allows an employer to mitigate some of their healthcare costs from offering expansive healthcare coverage to their team members.
Spousal Surcharges are an established practice, making them easier for employers to utilize. Compare that to say, offering employees compensation for opting out of coverage. These opt-out arrangements can be rife with compliance issues that could cause an employer to incur penalties under the ACA.
The benefits aren’t necessarily limited to employers. Spousal Surcharges can be better for employees than the alternative methods an employer could implement to save healthcare costs. For example, Spousal Carve Outs outright attempt to create exclusion rules so that employee spouses cannot be covered.
Utilize Spousal Surcharges or Dependent Exclusions to your Benefit
As we’ve outlined, any employer considering a spousal surcharge or outright exclusion will need to consider many factors before implementing the change. While this can be overwhelming to tackle, in the long run it can save a business thousands on costs and avoided fines, so long as they remain ACA compliant.
