GBS Health Benefits Compliance
Health Plan Carve-outs, Surcharges and Incentives for Working Spouses
Employer-sponsored health plans typically offer coverage for employees’ family members, including spouses. However, some employers implement special restrictions for working spouses to help reduce costs. These restrictions often take the form of:
- A spousal carve-out, which restricts or excludes eligibility for spouses with health coverage available through their own employers; or
- A spousal surcharge, which is an additional premium or contribution that employees must pay for covering spouses with health coverage available through their own employers.
In addition, employers may consider offering incentives, such as taxable cash payments or health reimbursement arrangement (HRA) coverage, to encourage employees to opt out of their health plan coverage and instead elect coverage through a spouse’s employer. This type of HRA, which is called a spousal incentive HRA, reimburses cost-sharing amounts that are incurred under the spouse’s employer’s health plan, such as deductibles, on a tax-free basis.
Spousal Carve-outs and Surcharges
To help control costs, some employers design their plans to include spousal carve-outs or surcharges. These special rules encourage spouses to enroll in their own employer-sponsored coverage when eligible. Typically, these restrictions do not apply to employees whose spouses are not employed (or whose spouses do not qualify for health coverage through their own employers). They can sometimes be useful as cost-saving measures for health plans with generous coverage rules, employer contributions, or both.
How the Restrictions Work
A spousal carve-out removes or restricts eligibility for spouses, and a surcharge adds an extra cost to coverage. Carve-outs are typically viewed as a more aggressive cost-savings approach because they can eliminate eligibility altogether, while surcharges allow spouses to stay on the health plan for an extra cost. These special rules work as follows:
- A spousal carve-out can take a variety of forms. One type of spousal carve-out provides that working spouses with available health coverage through their own employers are ineligible for coverage through the employee. Another type of spousal carve-out requires working spouses to enroll in coverage offered by their employers to be eligible for coverage through the employee, allowing the employer’s health plan to coordinate benefit payments with the spouse’s health plan.
- A spousal surcharge is an additional premium or contribution that an employee must pay for spousal coverage if the spouse could enroll in coverage through their own employer but chooses not to.
When evaluating which type of spousal coverage to implement, an employer would consider whether the restriction’s applicability should depend on the cost or type of health coverage offered by the spouse’s employer. For example, does the spouse’s employer offer a comprehensive group health plan or just an individual coverage HRA, or ICHRA, and how much does the spouse’s employer charge for coverage?
Regardless, any changes to spousal eligibility, such as a carve-out or surcharge, should be clearly described in plan-related documents that address eligibility, such as the Summary Plan Description (SPD), as well as open enrollment materials.
Compliance Issues
There is no federal health benefits law that specifically requires employers to offer health coverage to spouses.
- The Affordable Care Act’s (ACA) employer mandate rules do require applicable large employers (ALEs) to provide health coverage to their full-time employees and dependents or risk a penalty, but the coverage requirements do not apply to spouses. Thus, employers have a fair amount of flexibility under the ACA regarding spousal eligibility.
- There are multiple federal rules that prohibit discrimination, so spousal carve-outs and surcharges should be applied uniformly to all plan participants, regardless of age, health status or other protected factor. Some state laws may prohibit discrimination based on marital status, so it is important to check and confirm whether federal ERISA preempts these laws.
Contractual language: employers that want to restrict spousal eligibility (or implement a surcharge) should confirm their plan design is consistent with the terms of any underlying insurance policy or contractual agreement. Note also that state insurance laws include mandates for fully insured plans that may impact eligibility rules for spouses.
Incentives as an Alternative to Carve-outs and Surcharges
A less punitive cost-savings approach is to offer incentives to employees (and spouses) who opt out of the employer’s health coverage and instead elect coverage through the spouse’s employer. These incentives can be offered as:
- taxable opt-out /cash in lieu payments (included in gross income)
- a non-taxable spousal incentive HRA that reimburses cost-sharing amounts incurred by employee under the spouse’s employer’s group health plan
Taxable Opt-out or Cash in Lieu Payments
Some employers offer their eligible employees a cash incentive to waive coverage under the employer’s group health plan. These arrangements are often aimed at employees with working spouses eligible for health:
HSA eligibility
In general, individuals are ineligible for health savings account (HSA) contributions if they have health coverage that pays benefits before the annual minimum deductible for a high deductible health plan (HDHP) is met. Individuals whose medical expenses can be reimbursed by a spousal incentive HRA are not eligible for HSA contributions unless the HRA is designed to be compatible with HSA contributions.
It does not matter whether an individual is covered by the HRA as an employee or as a spouse whose medical expenses can be reimbursed; both types of individuals are ineligible for HSA contributions. However, spousal incentive HRAs can be designed to be compatible with HSA contributions by including a post-deductible option for employees enrolled in a spouse’s HDHP. Under this option, the HRA only reimburses cost-sharing expenses (e.g., copayments and coinsurance) that are incurred after the minimum HDHP family deductible has been reached for the year.
No premium reimbursement
Spousal incentive HRAs generally cannot reimburse the spouse’s premiums for coverage under their employer-sponsored health plan. In most cases, a spouse will pay their premiums for health coverage on a pre-tax basis through a Section 125 cafeteria plan. Federal tax law prohibits an HRA from reimbursing premiums for coverage paid on a pre-tax basis.
ACA reporting
The ACA requires certain employers to report information to the IRS each year about the health plan coverage they offer (or do not offer) to their employees. In general, HRAs are considered self-funded health plans subject to ACA reporting. An exception allows employers to avoid the coverage-reporting requirements for an HRA where the employee is enrolled in other major medical coverage through that employer. This exception does not apply to spousal incentive HRAs because employees waive health coverage through their employer to access the HRA’s benefits. Thus, sponsoring a spousal incentive HRA adds to the existing reporting obligation for ALEs and non-ALEs with self-funded health plans. Moreover, sponsoring a spousal incentive HRA will trigger ACA reporting requirements for non-ALEs with fully insured health plans that otherwise would not be subject to ACA reporting.
Links & Resources
- IRS FAQs on the ACA’s employer mandate rules
- IRS Publication 969 (“Health Savings Accounts and Other Tax-favored Health Plans”)
- IRS Notice 2013-54 and DOL Technical Release 2013-03 (guidance on integrated HRAs under the ACA)
