Q: Several employees covered under our company's group health plan have working spouses with coverage through their employer. We would like to offer them the option of declining our coverage if they can pick up coverage as a dependent through their spouse's plan.
As an added incentive, we want to offer them some of our premium savings, for example, maybe 50% of our premium payment, which we expect they will use to pay the additional cost for dependent coverage through their spouse’s plan.
Is it OK to simply give them a monthly check for whatever that amount may be?
A: While offering a cash incentive to an employee to entice them to decline the company's group medical coverage is a permissible cost-savings strategy, there are a number of important matters to consider before proceeding.
It's permissible to steer an employee to another private plan, i.e., a spouse's group plan, but it is illegal to direct someone towards Medicare, as stated in federal regulations.
The company should speak with their insurance adviser to examine the impact this strategy may have on their overall group insurance plan.
It is possible that the diminished participation among eligible employees may affect the costs of coverage at renewal time, possibly offsetting expected premium savings.
The individual mandate under the ACA (requiring individuals to have medical insurance) was invalidated last year so there should be no penalty on the worker who declines the company coverage and takes the money but fails to purchase alternate coverage.
And for the company with under 50 lives, the ACA's shared responsibility penalties on the employer for failing to offer affordable, minimal essential coverage, do not apply.
Any payment of this sort to employees declining coverage, even though it's expected that such money will be used to purchase dependent coverage, must be treated as additional wages, subject to all regular payroll taxes. And for nonexempt employees, it must be included in the regular rate of pay that is used to determine overtime pay.
If paid monthly, it would have to be allocated to the pay weeks in the month, and weeks in which more than 40 hours were worked, factored in to the overtime payment.
At the same time, the company should make it clear to the employee that this increase is solely the result of their declining coverage and if in the future they enroll in the company's plan, this money will be used to pay the employer portion of the premium and their taxable wages will be reduced accordingly.
It is not recommended that a company attempt to avoid subjecting this money to payroll taxes by offering to pay the amount directly to the employee's spouse's plan for dependent coverage.
Doing so might cast the company as a plan sponsor of another company's plan with which they really have no involvement or control (think COBRA, coverage or cost changes, etc.).
Another important consideration relates to enrollment restrictions. Many plans permit changes to coverage only during open enrollment periods. An employee's benefit elections made at the beginning of a benefit year may not be voluntarily changed midyear unless some significant personal change occurs, such as a change in family status, i.e., marriage, divorce, birth of a dependent, employment change such as termination, reduction in hours, or change in work site.
Further, an employee declining coverage when first eligible may not be able to enroll until the next open enrollment period, unless a qualifying event such as one of the above listed significant personal changes occurs that would cause a loss of coverage.
For non-medical coverage like life or disability insurance, no health statement or evidence of insurability is usually required if elected upon initial eligibility, but might have to be submitted if initially declined, but elected at a future date, even during open enrollment.
Overall, this can be an effective management strategy to save the company money, sharing some of that savings with employees.
However, it should be done carefully, and only after both management and the affected employees examine all of the implications.