Spousal carve-outs and spousal surcharges, also known as the Working Spouse Rule, have become more common after the Affordable Care Act (ACA) as the ACA provided a mechanism to make coverage available for spouses through the Marketplace. Under the ACA employer “pay or play” mandate, applicable large employers are only required to cover their full-time employees and dependent children to avoid a penalty.
Employers use spousal carve-outs and spousal surcharges as a means to control health care expenses. These methods may allow an employer to reduce the number of people enrolled on the group health plan, which in turn limits the potential claims exposure for the plan.
A spousal carve-out generally means an employer will not offer spousal coverage to spouses who have group health coverage available through their employer.
In a spousal surcharge situation, the spouse is still offered coverage, even if the spouse has other employer coverage available. However, if the spouse has other employer coverage available and chooses not to elect it, a surcharge is applied to be enrolled on the employer’s plan. In some instances a surcharge is not applied if the spouse also elects their employer’s coverage, as it would be primary, thereby reducing the potential claims exposure to the secondary plan. The surcharge is used to encourage spouses to enroll in health coverage available through their employer. Alternatively employers may offer a monetary award for spouses not enrolling in the health plan. Any monetary awards should be provided for under the cafeteria plan and provided on a taxable basis.
A 2016 Mercer survey indicated that just one in ten large employers excluded spouses with other coverage available, while the use of spousal surcharges increased for all large employers. Among the employers surveyed with 20,000 or more employees, only 8% excluded spouses while 27% required a surcharge. On average, the spousal surcharge equated to $100 per month.
Employees look at cost of coverage as well as types of coverage available when making decisions that best fit the needs of their family and lifestyle. Implementing spousal carve-outs or surcharges may cause employer issues as it may limit the employer’s ability to retain current employees or employ prospective employees.
In some states there may be laws that prohibit spousal carve-outs or surcharges or preclude their use based on sex or marital status. In Texas, small employers sponsoring fully-insured plans are required to offer coverage to each dependent of an eligible employee. Included within the statutory definition of dependent is both the employee’s spouse and child(ren). Large employers (>50 employees) who sponsor fully-insured plans may exclude spouses at the carrier’s discretion. Self-funded plans, which are generally subject to ERISA and not state law, may apply spousal carve-outs and surcharges.
Other insurance coverage which triggers a carve-out or surcharge should be employment based only. Medicare coverage is not based on employment and should not trigger a carve-out or surcharge as the Medicare Secondary Payer rules prohibit an employer with 20 or more full-time employees from “taking into account” the Medicare entitlement of an employee or covered family member. Therefore an employer must not carve-out or impose a penalty on spouses who have Medicare coverage, or provide an incentive for them to elect Medicare in lieu of the employer’s health plan.
In general, if an employer implements a spousal carve-out, the loss of coverage under the employee’s plan would generally allow the spouse an opportunity to enroll in their employer’s plan. However, the loss of eligibility due to a plan change does not provide a COBRA qualifying event for the spouse. Finally, if a spousal surcharge is implemented, it does not in itself trigger HIPAA Special Enrollment opportunity.
The information contained herein is for general informational purposes only and does not constitute legal or tax advice regarding any specific situation. Any statements made are based solely on our experience as consultants. Marsh & McLennan Agency LLC shall have no obligation to update this publication and shall have no liability to you or any other party arising out of this publication or any matter contained herein.