Spousal Exclusions and Surcharges… considerations and caveats

Employers are always looking for ways to reduce health care cost and restricting and/or eliminating spousal coverage is being used more than ever to accomplish that goal.  There are three approaches an employer can choose from when making spousal coverage changes:

1. Spousal Surcharge – a surcharge would allow an employer to charge more for spousal coverage based on the spouse’s availability to secure other group health coverage.  If a spouse was not working, they would pay less for spousal coverage than a spouse with access to group coverage elsewhere through their employer
2. Spousal Carve-Out – this would allow employers to only offer spousal coverage to spouses unable to secure group coverage elsewhere
3. Eliminating Spousal Coverage – this would make spousal coverage unavailable to all spouses regardless of their employment or coverage status

Before any of the three options above are implemented, an employer needs to consider the following:

1. How will this affect employee morale?
2. How will this affect the recruitment of future key employees?
3. If the surcharge or carve-out method are selected, there are administrative considerations to be aware of:
   1. how will employee verification be made?
   2. how will the employer confirm the spouse’s status?
   3. Will the employer require an affidavit?
   4. What disciplinary steps will be taken if an employee misrepresents their spouse’s status?

Regarding eliminating spousal coverage, It appears that excluding spousal coverage is not a violation of federal law.  The PPACA has generated new interest in restrictions pertaining to spousal coverage for several reasons.

Employers who meet the definition of applicable large employer (ALE) under PPACA are required to offer coverage to employees and “dependents” or face possible penalties under the employer shared responsibility requirements of PPACA.  IRS guidance defines “dependents” to exclude spouses; consequently, ALE’s do not have to offer coverage to spouses to avoid PPACA penalties.

Another factor igniting the rethinking of spousal coverage elimination is the availability of PPACA’s individual coverage subsidies if a person is not offered coverage.  If a spouse is not offered other group coverage at all, they may be able enroll through the marketplace and qualify for subsidy based on their household income.

Another fueling factor for excluding spouses is related to the potential Cadillac tax.  By excluding spouses, the premium value of family coverage to the employee for purposes of the Cadillac tax would be lower and ultimately could lower that tax liability of the employer.

Employers are being forced to find new ways to save money and although unconventional, the elimination or alteration of spousal coverage will become more popular as cost continue to rise.

For guidance or more information related to this topic, contact The Lank Group.