Employer-sponsored health plans typically cover employees’ spouses, but some employers have cost‑saving rules for working spouses. These may include:
- Spousal carve-outs: Spouses are not eligible if they can get health coverage through their own employer; or
- Spousal surcharges: Employees pay an additional premium to cover a spouse who has access to their own employer’s plan.
Some employers also offer incentives like taxable cash or a health reimbursement arrangement (HRA), to encourage employees to use a spouse’s employer plan instead. A spousal incentive HRA can reimburse the employee for tax‑free cost-sharing expenses like deductibles under the spouse’s plan.
Spousal Carve-outs and Surcharges
To help manage rising health plan costs, some employers use spousal carve‑outs or surcharges to encourage working spouses to enroll in their own employer’s coverage when eligible. These rules usually don’t apply if a spouse is unemployed or not offered health coverage. They can be especially effective for plans with generous benefits or high employer contribution levels.
How the Restrictions Work
A spousal carve‑out removes or limits a spouse’s eligibility, while a spousal surcharge adds an extra cost for covering a spouse who could enroll in their own employer’s plan. Carve‑outs are considered more aggressive because they may block eligibility entirely, whereas surcharges still allow enrollment at a higher cost. These special rules work as follows:
- Spousal carve‑outs: May exclude spouses who have access to their own employer’s coverage or may require the spouse to enroll in their employer’s plan first, with the two plans coordinating benefits.
- Spousal surcharges: An additional premium an employee must pay when a spouse declines their own employer’s coverage.
Employers using these rules may also consider the cost and type of coverage the spouse’s employer offers, such as whether it’s a full group health plan or only an ICHRA, and how expensive it is.
Any changes to spousal eligibility must be clearly explained in plan documents, including the Summary Plan Description and open enrollment materials.
Potential Legal Issues
Federal law does not require employers to offer health coverage to spouses. Under the Affordable Care Act, large employers must cover full‑time employees and dependent children, but not spouses, giving employers flexibility in setting spousal eligibility rules. Employers that add spousal restrictions or surcharges should ensure these rules align with their insurance policies and any applicable state mandates for fully insured plans.
To avoid discrimination concerns, carve‑outs and surcharges should apply consistently to all participants, regardless of age, health status, or other protected factors. While some states ban marital‑status discrimination, ERISA may preempt these rules for private‑sector group health plans.
Incentives to Waive Coverage
A less strict cost‑saving option is to offer incentives for employees and their spouses to waive the employer’s health plan and enroll in the spouse’s employer’s coverage instead. These incentives can be taxable cash payments or a spousal incentive HRA, which reimburses the employee for cost‑sharing expenses under the spouse’s group health plan. Like traditional HRAs, the HRA’s value isn’t taxed, and reimbursements for medical expenses are excluded from the employee’s income.
Taxable Opt-out Payments
Some employers offer cash incentives for employees to waive coverage, especially when a working spouse can enroll the family in their own employer’s plan. These opt‑out payments are usually much lower than what the employer would spend on health coverage and are typically paid throughout the year to limit financial risk if an employee leaves.
While allowed, cash opt‑outs come with several compliance considerations:
- Taxation: Opt‑out payments are taxable income, must be reported on Form W‑2, and must be offered through a Section 125 cafeteria plan.
- ACA affordability: Depending on how the payment is structured, it may increase the employee’s “required contribution,” making the plan appear less affordable under ACA rules.
- Nondiscrimination: Payments must be offered uniformly to avoid discrimination issues.
- Overtime rules: In some cases, opt‑outs may affect overtime calculations under wage laws.
Employers with fully insured plans should also confirm that offering opt‑out cash incentives does not violate participation requirements or other insurance contract terms.
Spousal Incentive HRAs
A spousal incentive HRA functions like a traditional HRA but is available only to employees who enroll in a spouse’s employer-sponsored health plan. It reimburses eligible out‑of‑pocket medical costs tax‑free, encouraging employees to choose the spouse’s coverage instead of their own employer’s plan.
These HRAs must follow many of the same rules as traditional HRAs, with a few key compliance points:
- ACA integration: Employees and family members must be enrolled in another group health plan with major medical coverage. Employers can rely on an employee’s reasonable confirmation of this.
- HSA compatibility: Because HRA reimbursement can disqualify individuals from making HSA contributions, the HRA must be designed as post‑deductible if the spouse is enrolled in an HDHP. Under this design, the HRA reimburses expenses only after the HDHP family deductible is met.
- Premiums not reimbursable: Spousal incentive HRAs generally cannot reimburse the spouse’s premiums, since those premiums are usually paid pre‑tax through a cafeteria plan.
- ACA reporting: Spousal incentive HRAs are treated as self-funded plans and trigger ACA reporting requirements. Unlike traditional HRAs paired with the employer’s own medical plan, these HRAs do not qualify for reporting exceptions and may create new reporting obligations for employers.
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Links and Resources
- IRS FAQs on the ACA’s employer mandate rules
- IRS Publication 969 (“Health Savings Accounts and other Tax-favored Health Plans”)
- IRS Notice 2013-54 and DOL Technical Release 2013-03 (guidance on integrated HRAS under the ACA)