Recently issued guidelines have generally eliminated an insurance carrier's ability to impose "participation" requirements. These requirements directed an employer to ensure that a minimum threshold of group participation was satisfied before a group health policy was issued.  Although minimum participation rules are out, carriers can still impose higher premiums to address possible risk exposure.  This places some employers with lower wage earning work forces in a difficult position. In these cases, employees may wish to decline health coverage, particularly if required contributions significantly erode take home pay. 

HUB International's team of compliance officers recently participated in a conference call with key regulators from all three federal agencies. The discussion centered on carrier practices, including employer-paid premiums of up to 100% of employee-only coverage and higher ratings for groups that do not meet certain participation levels. Representatives from the United States Department of Health and Human Services (HHS) labeled these carrier practices as "very disturbing."

The "participation" issue gives rise to a series of logical questions. Can an employer require all employees to participate in a welfare benefit plan? More significantly, may an employer stipulate that workers contribute toward costs (e.g., for medical or disability coverage) as a condition of employment?  In other words, can an employer mandate payroll deductions for the portion of benefit costs by making plan participation itself a condition of employment?  

The employer's ability to enforce such a requirement is not specifically limited by the Internal Revenue Code (the Code) and ERISA.  It is not unusual for employers to stipulate participation in certain benefit plans as a condition of employment where the employer offers "free" coverage (e.g. a minimum level of coverage is provided on an employer-pay-all basis).This is a good example of federal (and state) laws creating unexpected obstacles, especially relevant in the era of the Patient Protection and Affordable Care Act (PPACA, or federal health care reform). 

PPACA and Employer Coverage Mandate 

Beginning in 2015, . Specifically, an employer subject to the law must provide a compliant Employer Mandate Final Regulations Published"offer" of coverage to discharge the mandate or be subject to a potential penalty assessment.  In satisfying the mandate, an employer must offer coverage to all full-time employees and their dependents.  Under health care reform, the coverage is deemed "offered" when an employee is presented with the rights of acceptance or refusal. 

Will "mandatory" participation be treated differently from health care reform's penalty perspective?  The answer is unclear.  At this time HUB has no official pronouncement as to whether a "mandatory" participation rule fulfills the PPACA "offer" requirement.  However, since the statute itself appears to include an opportunity to decline the employer plan, the question becomes critically important. The good news is that the latest regulations codify an employer's ability to use an "evergreen" election system of automatic renewal in subsequent years unless the employee affirmatively elects to drop.  Although evergreen elections will discharge the mandate rule, HUB will closely monitor the mandatory participation requirement issue.

Fair Labor Standards Act 

The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping, and child labor standards. This Act affects millions of full-time and part-time workers in private sector and Federal, state, and local government jobs.  If a plan sponsor has employees paid at or near the FLSA-imposed minimum wage, the employer should consider the possible FLSA impact of any benefit plan design changes that involve payroll deductions.

In general, the FLSA prohibits an employer from requiring deductions from an employee's wages if the deduction would reduce a worker's average hourly pay to less than the required legal minimum.  This restriction generally applies only to deductions where the employee is allowed no other options.  Provided that the employee authorizes the employer to do so, certain deductions (including those for insurance premiums) are allowed, even if they reduce an employee's wages below the FLSA minimum.  Although the statute does not directly define the term "voluntary," DOL representatives have stated that requiring plan participation as a condition of employment is not voluntary.

This position is not specifically stated in FLSA's statutory language or within any interpretive regulation.  Rather, the conclusion is based upon the statute's requirement that employers pay the minimum wage as required by FLSA. The law does not "carve out" any exceptions for the "required as condition of employment" situation. 

In applying this rule, the DOL generally takes the position that local facts and circumstances matter.  The DOL's assessment of whether a deduction is "voluntary" includes evaluating whether an employer, or individuals working on the employer's behalf, profits from the transaction. As noted above, although the DOL precludes deductions for benefit costs if the resulting pay to the employee drops below the FLSA minimum wage, FLSA concerns appear to be reduced in cases where pay does not dip below minimum wage, or where the employer can show it is not impermissibly serving itself.  

Religious Objections 

Employers may need to consider the implications of mandating coverage where participants articulate specific moral objections to receiving such coverage. There are a number of court cases that have examined employer obligations to honor reasonable objections (i.e. worker religious beliefs).  In such situations it may be necessary to document the situation and weigh the consequences of enforcing a health coverage mandate rule versus the cost of litigating a complaint.

ERISA Considerations 

ERISA's reporting and disclosure duties will be triggered if an employer shifts from a traditional benefit program to one where health coverage is made a condition of employment.  First, the "compulsory" nature of the coverage could be regarded as a decision which triggers the accelerated Summary of Material Modification ("SMM") rule.  When that disclosure rule is activated, an employer has 60 days from the date the plan change is adopted to distribute an SMM explaining the change. Second, that change would eventually have to be reflected in the plan's permanent Summary Plan Description ("SPD").

In circumstances where the employer is seeking to mandate coverage, notifying the workforce in advance and offering plenty of lead time along with accurate information about the looming plan changes will be beneficial to both employer and employee..  Many employers opt for a simple memorandum outlining the changes, and highlighting the timing involved with transitioning the plan to a mandatory coverage rule


We want to underscore that the Code and ERISA are not the only laws which must be taken into account when considering plan design changes. Other Federal laws may apply and there may also be state laws and regulations which come into play. Labor relations and employee morale issues must also be considered by employers with ambitions of significant plan redesign.

For more information, read the HUB International Client Bulletin: Employer Mandate Final Regulations Published.