Spousal Flexibility

By: HUB’s EB Compliance Team

As employers look to manage their benefits costs, sometimes they consider taking steps to limit plan eligibility for spouses. This can be particularly useful when the employer sees significant claims come from spouses and those spouses are likely to be offered coverage through their own employers. There are a few different strategies for exercising spousal flexibility:

Spousal surcharges are where spouses who have access to their own employer plan must pay extra to be covered under the plan.

Spousal carve outs are where spouses who have access to their own employer plan are not eligible under the plan. 

Spousal exclusions are were the plan does not offer coverage to any spouses at all.

Spousal Incentive HRAs are HRAs available only to those who waive the employer’s coverage that can be used to pay out-of-pocket medical expenses incurred under a spouse’s employer plan. (HUB has a blog post about the economic advantages of these HRAs here).

Flexibility in Practice

How do these options work in practice? Take our imaginary couple, Jack and Diane. In our example, Jack works for Farm Co, and Diane works for ABC Accounting; both are offered health coverage by their respective employers.

Jack’s employer, Farm Co, adds a spousal surcharge to its plan. It charges employees an extra $100 per month to enroll their spouses if their spouse is offered coverage through their own employer. In that case, Jack would be able to enroll Diane in the Farm Co plan. However, he would pay an extra $100 per month since she is offered coverage through her own employer.

Imagine instead that Farm Co adds a spousal carve out to its plan. Thus, employees are unable to enroll their spouses who are offered coverage through their own employer. Since Diane is offered coverage by her employer, Jack is not able to enroll her in the Farm Co plan.

On the other hand, assume Diane’s employer, ABC Accounting, adds a spousal exclusion to its plan. This means spouses are simply not eligible for their plan, regardless of whether they are offered coverage by their own employer. Diane is not eligible to enroll Jack in the ABC Accounting plan.

Imagine instead that ABC Accounting adds a spousal incentive HRA option to their plan. This HRA incentivizes employees to enroll in their spouse’s plan. If Diane waives coverage under the ABC Accounting plan and enrolls in the Farm Co plan through Jack, she will have access to the spousal incentive HRA. The HRA can then be used to pay their out of pocket medical expenses under the Farm Co plan, potentially leading to first dollar coverage when the HRA and the Farm Co plan are combined together.

Pros and Cons of Spousal Flexibility

The main reason employers consider implementing one of these strategies is cost management. By discouraging or even preventing spouses from enrolling in their plan, employers are likely to see at least some decrease in enrollment in their plans. The extent to which they will see decreases in enrollment depends on which option they choose. By nature, plans with spousal exclusions will see larger decreases in enrollment than plans with spousal surcharges.

Employers implementing such flexibility need to understand its limitations. For example, options short of spousal exclusions will not eliminate the plan’s risk of claims from spouses. In fact, these measures could lead to adverse selection, where spouses with low utilization move off the plan, while the plan retains the spouses with high utilization.

Additionally, these options could lead employees to be upset by surcharges their spouses are subject to, but non-working spouses are not. At a minimum, employees who are seeking to maintain family coverage under the same plan will have to pay more for this combined coverage. Family coverage won’t even be an option for employees whose employers opt for spousal carve outs or exclusions.

Administrative and Compliance Considerations

While a full discussion of all administrative and compliance considerations is beyond the scope of this piece, there are a few items employers adopting these programs should consider:

• For spousal surcharges or carve-outs, employers generally try to obtain affidavits or other statements that the spouse is not eligible for other coverage, which creates more administrative work.
• For spousal HRAs, requiring proof of the availability of other coverage can create additional administrative work.
• For spousal HRAs, employers must be sure that the HRA meets all the requirements under the Affordable Care Act (“ACA”) to be treated as “integrated” with the spouse’s plan. Otherwise, it may violate some of the ACA rules, such as the requirement not to have lifetime or annual limits on essential health benefits.
• Some spousal HRA providers also offer reimbursement of the spouse’s premiums. However, tax guidance suggests that this may not work if the spouse is paying for coverage on a pre-tax basis. Employers should consult with their attorneys or tax advisors if adopting this feature.
• For employers subject to ERISA, any of these changes will require updates to the plan documents and summary plan descriptions. Spousal HRAs, in particular, may require their own plan document and summary plan description.

Notably, since spouses are not currently required to be offered coverage under the ACA employer mandate, none of these approaches should increase the risk of an ACA employer mandate penalty, for employers subject to that mandate (more information on the mandate is available here).

Conclusion

For employers considering one of these plan options, here are some questions to consider.

• Are a disproportional number of claims incurred by spouses?
• Is spousal enrollment a significant portion of your total enrollment?
• Are the enrolled spouses likely to be offered coverage by their own employers?
• Are you prepared to manage employee disruption caused by a surcharge/carve out/exclusion and the additional administrative complexity and compliance obligations?

If you have any questions, please contact your HUB Advisor. You can also view more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.