Balancing Benefits and Budgets: Compliance Considerations for Implementing Spousal Surcharges and Carve- Outs in Group Health Plans 

By Anne E. Hensley

Employers sponsoring group health plans often look for ways to control rising healthcare costs. One strategy is imposing restrictions or additional premiums on spousal coverage. This is especially relevant for plans with generous dependent coverage or where many employees elect family coverage. Two common approaches are spousal surcharges and spousal carve-outs. These strategies, however, raise important compliance and administrative considerations under federal laws like the Affordable Care Act (ACA), Health Insurance Portability and Accountability Act (HIPAA), Employee Retirement Income Security Act (ERISA), and applicable state laws.

Spousal surcharges
A spousal surcharge requires employees to pay an extra premium if their spouse is covered under the employee’s plan but has access to health insurance through their own employer and chooses not to enroll. This surcharge encourages spouses to use their own employer’s coverage, which may help reduce costs for the sponsoring employer.

Spousal carve-outs
Spousal carve-outs are restrictive provisions that limit or remove spousal coverage. Common types include:

1. Complete elimination of spousal coverage
2. Excluding spouses with access to other employer-sponsored coverage
3. Excluding spouses unless they enroll in their own employer’s plan, making the employee’s plan secondary

Compliance considerations

Affordable Care Act (ACA)

According to the ACA’s Employer Shared Responsibility mandate, or “pay or play” rules, any Applicable Large Employer (ALE) who does not offer specific types of coverage to full-time employees and their dependents may be subject to a tax penalty. Spousal carve-outs and surcharge provisions generally do not affect an employer’s “pay or play” analysis because the law does not require employers to offer coverage to spouses.

In some cases, a spousal exclusion may benefit the employee if the additional cost to add the spouse exceeds what the spouse would pay on the Exchange with a premium tax credit (PTC). However, if the employer offers an opportunity to enroll in coverage, this may eliminate the spouse’s ability to receive a PTC if the coverage to the employee (and dependents) is considered affordable under the ACA.

A spousal surcharge might affect a plan’s grandfathered status if the employer adds a surcharge that reduces the employer contribution by more than five percent for any tier of coverage compared to what the employer contribution was on March 23, 2010. 

HIPAA special enrollment rights
As required by HIPAA, plans must allow special enrollment outside open enrollment for qualifying events. Implementing a spousal carve-out triggers a special enrollment opportunity for the spouse to enroll in their own employer’s plan mid-year. This is not the case for a surcharge. The employee may have to pay the higher spousal surcharge until the next enrollment period for the spouse’s employer-sponsored plan.

COBRA
The Consolidated Omnibus Budget Reconciliation Act (COBRA) generally requires group health plans sponsored by employers with 20 or more employees in the prior year to offer employees and their families a temporary extension of health coverage in certain instances where coverage would otherwise end. COBRA continuation coverage must be offered when coverage ends due to qualifying events. Loss of coverage due to a spousal carve-out is not a COBRA qualifying event for the spouse.

State law issues
Some states prohibit marital status discrimination, which could affect the legality of spousal surcharges or carve-outs. ERISA generally preempts state laws for self-insured plans, allowing carve-outs or surcharges despite state restrictions. Employers should consult legal counsel to confirm compliance with state insurance and employment laws.

ERISA and Section 125 plan amendments

ERISA requires plan eligibility rules to be documented in the plan document and Summary Plan Description (SPD). Employers should amend these documents before implementing spousal surcharges or carve-outs. For example, if carrier documents indicate spouses are covered, those documents would need amendment; if silent, the wrap document should describe the spousal carve-out. Any amended plan document requires a corresponding SPD amendment or issuance of a Summary of Material Modifications (SMM). When reducing benefits, the SMM should be provided within 60 days of the change. 

Section 125 cafeteria plan documents may also need amendment if they promise spousal medical benefits.

Medicare Secondary Payer (MSP) rules
MSP rules require employers with 20 or more employees to offer the same group coverage to employees and spouses aged 65 and older as to younger employees. Surcharges or carve-outs targeting spouses eligible for Medicare may raise MSP compliance issues. Employers should consult legal counsel to avoid potential violations.

HR administrative and employee relations considerations
Implementing spousal surcharges or carve-outs creates administrative challenges. Employers should:
• Define what qualifies as other coverage (e.g., does a preventive-only MEC plan count?).
• Establish verification processes for spouse coverage eligibility (e.g., will affidavits be required from employees and spouses?).
• Decide on consequences for misrepresentation of spouse coverage status.
• Update employee handbooks, HR policies, and payroll systems to reflect changes.
• Communicate clearly and early with employees about eligibility rules, verification procedures, and potential penalties.

Clear communication is important to help avoid employee dissatisfaction and complaints to the Department of Labor, which could lead to audits or investigations. Employers should provide sufficient time for employees to secure alternative spousal coverage.

Conclusion
As healthcare costs rise, more employers consider spousal surcharges and carve-outs to manage expenses. While these tools may help reduce costs, employers should carefully navigate federal and state legal requirements, update plan documents, and manage HR processes effectively. Transparent communication and legal consultation can be helpful for implementing these changes effectively.

The ACA requires all health insurance sponsors to provide a Summary of Benefits and Coverage (SBC) to all plan participants. If any changes are made mid-plan year that affect the content of the SBC, the SBC must be amended and participants must be provided with at least 60 days’ advance notice. The SBC generally does not require eligibility language; however, this should be confirmed when making significant changes to the plan.