August 26, 2021
Business Group on Health has identified an increase in the number of employer plan sponsors considering whether a medical plan premium surcharge for COVID-19 unvaccinated employees is appropriate, workable or even permitted for their plan going into 2022. The discussion appears to be driven mainly by two objectives: incentivizing and encouraging COVID-19 vaccinations to protect their employees from severe disease and death in case of infection, and mitigating plan costs associated with hospitalization and treatment of COVID-19 patients, the overwhelming majority of whom have recently been reported to be unvaccinated.
In general, it appears that a COVID-19 unvaccinated premium surcharge would be legally permitted, but may have compliance, operational and financial consequences that an employer would want to consider before adoption. For large, self-insured employers, Equal Employment Opportunity (EEO) laws, the Affordable Care Act (ACA) and HIPAA wellness program requirements, at a minimum, share jurisdiction over any would-be premium surcharge for COVID-19 unvaccinated employees. While details are provided below, here is a summary of the role of each set of laws:
- The EEOC has provided guidance indicating that an incentive structured as a penalty (which is expected to include a premium surcharge) is permitted within certain parameters;
- The ACA requirements regarding “affordability” may make such a surcharge unworkable or challenging for employers with lower-paid workforces or who use the Federal Poverty Line (FPL) affordability safe harbor. Employers with generally higher-paid employees and who are not reliant on the FPL for compliance may have more flexibility for a premium surcharge.
- Any premium surcharge would likely have to meet the requirements of a health-contingent HIPAA Wellness Program. However, the question appears open as to whether such a program would be considered “activity-based” or “outcome-based.” The decision that is ultimately made will likely determine the different requirements and standards the premium surcharge is subject to.
The EEOC recently provided guidance stating that employers may incentivize employees to get vaccinated through the use of a reward (e.g., a credit) or a penalty. The Business Group previously provided this summary to members. However, the guidance provides no details regarding how an employer would successfully structure a penalty. While it’s helpful to know that in theory a premium surcharge could be permitted under federal EEO laws enforced by the EEOC (e.g., the Americans with Disabilities Act), additional guidance may be needed before employers could be assured that their program would not be viewed as discriminatory or increase litigation risk.
ACA Affordability Impacts
While the ACA 4980H affordability requirements do not directly impact the design or governance of the premium surcharge itself, they may make a premium surcharge unworkable, cause additional 4980H(b) (“tack hammer”) penalties or require an overall increase in either employee wages or the premium subsidy to ensure that low-cost coverage remains affordable under the ACA.
The ACA regulations state that only wellness program incentives related to tobacco use are treated as earned in determining affordability. This means that an employer may calculate the low-cost option (LCO) for meeting affordability as if everyone satisfied the tobacco use wellness program requirements and is paying the lower premium amount. All other wellness programs are treated as unearned. In the case of a COVID-19 unvaccinated premium surcharge, the employer would be expected to include any COVID-19 unvaccinated premium surcharge in its ACA LCO calculation for everyone, not just those who are unvaccinated. In many cases, this addition to the price of the LCO may cause the coverage to no longer meet an affordability safe harbor that would otherwise apply and protect the employer from ACA penalties.
Assume that the employer offers a plan with an LCO of $90/month, which meets the FPL affordability safe harbor.
- 1 | Employer A has a tobacco-use premium surcharge of $20/month. The LCO for everyone is still allowed to be reported as $90/month whether or not the person is actually charged the tobacco-use premium surcharge.
- 2 | Employer A adopts a COVID-19 unvaccinated premium surcharge of $50/month. Since only a tobacco surcharge is permitted to be factored out, it appears that the LCO for everyone reported would be calculated as $140/mo. (to include the premium surcharge), which would not meet the FPL affordability safe harbor.
An employer that does not rely on the FPL safe harbor and whose employees’ applicable wages are relatively high may be better positioned to add a COVID-19 unvaccinated premium surcharge. This is because even with a premium surcharge added to the otherwise applicable LCO, the total amount may still satisfy either the W-2 or Rate of Pay affordability safe harbor.
Employers that do not have a more highly paid workforce may have at least two additional adjustments to consider before implementing a premium surcharge without raising the risk of ACA penalties. First, they could consider broadly raising wages and use either the W-2 or Rate of Pay affordability safe harbor. Obviously, this could be cost prohibitive with the direct wage costs, employment taxes and other impacts to total compensation and benefit calculations, including retirement plans and life insurance offerings, among others.
Alternatively, the employer could reduce the starting price of the LCO by increasing its employer premium contribution so that even with the COVID-19 unvaccinated premium surcharge added, the final calculated LCO would be less than the required LCO limit for the FPL method. (e.g., following the example above, if the LCO were reduced from $90 to $45, then the added $50 premium surcharge would put the LCO at $95, which would still be under the FPL limit for affordability). This approach would require additional employer investment but would be on a tax-free basis and would only be recognized for employees who actually elect the applicable coverage.
To avoid these ACA complications and broaden the availability of a COVID-19 unvaccinated premium surcharge, additional rulemaking or temporary relief would be required from the Department of Treasury and the IRS. Such action would essentially need to expand the exception for tobacco-use wellness programs to also cover COVID-19 vaccine-related wellness programs in the LCO affordability calculation.
HIPAA Wellness Program Considerations
HIPAA generally prohibits discrimination regarding employee premiums or contributions based on “health status-related factors.” The list of factors includes “receipt of health care,” which could be construed to include whether someone receives the vaccine. Given this restriction, a plan generally could not simply “charge more” or add a premium surcharge and satisfy HIPAA requirements.
HIPAA provides exceptions to the nondiscrimination rule related to price differences for “wellness programs” that meet certain standards. Establishing a COVID-19 unvaccinated premium surcharge is generally possible within a HIPAA compliant wellness program but will be required to meet the applicable standards and be appropriately administered and documented. Additionally, it will likely be a “health-contingent” wellness program, which has two sub-categories: --“activity-based” or “outcome-based” – each with its own requirements and considerations.
In general, the activity-based wellness programs are somewhat less burdensome and restrictive on employers, but at this time it is unclear under which category a COVID-19 unvaccinated premium surcharge would be viewed. A prime categorization consideration seems to be a question of whether the incentive is being granted for “getting the vaccine” (activity) or “being vaccinated – as compared to the prior status of unvaccinated” (outcome). Additional agency guidance on this matter would be helpful to ensure that employers have certainty regarding the compliance requirements of a premium surcharge but should remain flexible for employers to design programs that work for their workforce.
In addition, employers should be aware and may wish to seek assistance identifying other requirements applicable to their specific plans, designs or operations. This may include applicable state laws and cafeteria or other plan updates that may be needed. Also, there will be many fundamental design and administration elements to consider; some examples include the amount of the surcharge; its application to any available booster vaccines; proof of vaccination be requirements, if any; and the establishment of accommodations or reasonable alternative standards. Employers will likely need to consult with their plan consultants and legal counsel to help ensure that any COVID-19 unvaccinated premium surcharge program aligns with the employer’s objectives and satisfies all applicable legal requirements.
We provide this material for informational purposes only; it is not a substitute for legal advice.