Tuesday, July 10, 2012

Will Spousal Surcharges and Exclusions stick around after 2014?

You probably have clients who have researched implementing a spousal surcharge or exclusion. You may have some who have already done so for the 2011 or 2012 plan year. Spousal carve outs have grown exponentially over the past few years as an important way to offset rising health care costs. It’s likely that we’ll see them continue to grow in popularity… unless PPACA is interpreted as making them illegal. 

A debate arose in our office recently. Because we care about our partners, we have strong opinions about health care topics and how the PPACA legislation will play out for your clients. This time, the debate was about spousal exclusions and surcharges, and whether or not they’ll last after 2014. Our dependent audit team has seen a sharp escalation in the number of verifications for spousal exclusions and surcharges, which piqued the interest of our CHROME Compass consultants.

Spousal “carve out” is one way that employers are addressing the rising costs of health care coverage, and the trend is well documented, both in trade publications and the general media. In the fall, the Society for Human Resource Management featured an article on the renewed interest in the “working spouse” provision. The CNN Money blog had a post about it this time last year as provision on 2012 plans that employees should get used to seeing. Entrepreneur magazine outlined spousal exclusion as a good option to keep the rest of the benefits plan robust.

Most commentators note that excluding or mandating a surcharge for working spouses with other access is not going to be good for every company. As you know from working with your clients, each employer is different, and plan specifications must be carefully crafted to best serve the company’s needs. Companies need to have a plan for verifying working spouses before implementing the provision. Articles rightly advise that employers need to question if savings will counter additional administrative burden or business disruption.

So, while many are discussing the rising popularity and what types of companies could benefit from it, few people seem to be talking about the potential legality of spousal carve out or how long the provision will be permitted to last after 2014. That was the subject of our office debate this week.

Some members of our team believe that an explicit interpretation of PPACA disallows spousal exclusion. PPACA requires that coverage is offered to employees and their dependents… regardless of access elsewhere. The intent of the law appears to end spousal exclusion entirely, and when the health care reform law comes into full effect in 2014, spousal exclusions may be penalized or eliminated. Additionally, while working spouse provisions are ERISA-compliant and legal under most federal laws, they may not be compliant with state marital discrimination laws.

Another faction in our office points out that legislative intent does not necessary mandate how the final law is interpreted and how it will play out in reality. Legal contests don’t always make provisions like this go away, and, even if the legislative intent is clear, loopholes are guaranteed. To date, the mechanism for penalty if an employer excludes spouses with access to other coverage is yet undetermined. We first assumed that there may be a $2000 or $3000 penalty for exclusion, following the tradition of the other penalties built into PPACA. That is not yet outlined, so, if anything, it’s becoming more possible that this provision would fall under nondiscrimination testing.

Surcharges, as opposed to exclusions, seem to have a stronger argument under PPACA, although there still is not enough guidance to confidently answer either one. Studies show that $600-$1,200 in annual charges for spouses with access elsewhere, on top of premium costs, may incentivize spouses to engage their own employers’ plans. As a bonus, those who remain on the plan contribute increased premium revenue.

Our debate wasn’t officially resolved, but these are the questions we’re bringing to our partners and our clients. Where do you stand on these cost reduction strategies for your clients’ next plan year? If you’re recommending a spousal exclusion or surcharge, how are you verifying them?

This article was first featured in the April 24th edition of our e-newsletter, Directions. If you'd like to receive that weekly email, contact directions@continuoushealth.com. (Your email will never be shared, sold, or otherwise distributed, and you will receive only the type of content for which you sign up.)

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