Q. We are a self-insured company, and pay 100% of the premiums for employee-only health insurance coverage. (Employees with spouses and families are responsible for those premiums.) After several large claims last year, our president decided to increase the premiums deducted from employees’ paychecks. However, the rate he has directed to be deducted is higher than the rate at which we are billed for the spouse and dependent coverage. Is it legal to make money off of the “premiums” we ask employees to pay?
A. Employers are generally free to decide how much of the costs of health insurance coverage to pass through to employees. Generally, the process for establishing premiums for self-funded health benefits starts with the employer getting a handle on three major variables:
- Expected costs of the benefits themselves
- Extent to which those benefits costs are covered by a stop-loss carrier
- Expected costs of plan administration.
Taken together, these variables will define how much out-of-pocket expense the employer can expect to incur for the year. Usually, an actuary or other consultant helps to flesh out those variables.
With the expected costs of the plan in hand, the employer must then determine how to share those costs with employees. Typically, the employer bears the bulk of the costs of the plan and passes through some fraction to employees based on the type of coverage elected, such as self-only, employee and spouse, family, etc. Many employers cover the full cost of basic, self-only coverage but charge higher premiums for spousal and family coverage.
While the amount of cost sharing offered to employees is largely up to the employer, I cannot say I have ever considered whether an employer might add a surcharge so as to effectively make money off of the plan. Usually, premiums for self-funded coverage are based entirely on the costs of operating the plan, and the cost-sharing percentages are driven by business and competitive factors and the employer’s willingness to spend money subsidizing the cost of health benefits.
It is not clear to me that the employer here is necessarily trying to make money off its plan, although that is obviously prompting the question. If the employer simply decided to impose a surcharge on enrollees—without actuarial input or other evidence tied to the operating costs of the plan—it is probably within its rights, as long as that is communicated clearly.
If the employer chose to impose such a surcharge and failed to communicate that fact to enrollees, that could result in claims of breach-of-fiduciary-duty under the Employee Retirement Income Security Act (ERISA).
Of course, such a strategy might also causeproblems and make it harder to attract and retain employees.
In addition, it could also have an impact under the employer mandate of the Affordable Care Act health care reform law, by causing the plan to cease providing minimum value or become unaffordable to employees.
Perhaps the issue here is really more about adjustments to the cost-sharing levels for spousal/family coverage than a naked attempt to profit from the plan. If the employer simply wants to increase the costs of spousal/dependent coverage paid by employees from $50 per week to $200 per week, that is not really “profiting” from the plan.
That’s just changing the allocation of costs between the employer and the employees, which is legal.
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