Let's start by clarifying: there is a significant difference between a spousal/dependent surcharge and a spousal/dependent exclusion or carve-out.
A spousal or dependent surcharge would involve 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). For example, an employer decides to charge an extra $100 per month to any employee who covers his or her spouse under their medical plan if the spouse is eligible for coverage under another employer’s health plan. If the spouse or child is not eligible under another employer health plan, the extra $100 wouldn’t be imposed.
In contrast, an outright spousal or dependent exclusion for those who have access to other group coverage would make the spouse or dependent ineligible for coverage. This design might violate insurance law in some states for fully-insured plans, as well as the employer mandate for applicable large employers.
So, the main concerns when implementing a spousal surcharge (i.e., charge more premium for a spouse that has access to other group coverage) include the following:
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:
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;
So, 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.
ERISA plan document and SPD – If a surcharge is implemented, the plan document and 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.
Employer Mandate – The ACA requires group health plans to make coverage available to dependent children up to age 26, and the employer mandate provisions generally require that applicable large employers 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. And 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.
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.
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.
Therefore, if an employer is considering a spousal surcharge or outright exclusion, they’ll need to consider many factors before implementing the change.