What is a spousal carve out and a spousal surcharge program, and how do they differ?

A spousal carve out is a health insurance plan design employers use to control health care costs by placing restrictions on coverage for an employee's spouse. Another term used for this type of plan design is the "working spouse rule." Employers commonly use several spousal carve out design variations. However, most designs apply such restrictions only to spouses who have coverage available from another employer. The most aggressive design simply defines the spouse as ineligible for the plan entirely if the spouse has coverage available from another employer.  

An alternate design is a spousal surcharge approach. With a spousal surcharge program an employee must pay an additional cost to cover a working spouse who has the option to elect health coverage from his or her employer and has declined the coverage. In contrast, some employers prefer a positive approach by providing a monetary reward or incentive to employees who do not enroll their spouses in the employee plan. A less aggressive design method is permitting spouses to enroll in the employee plan only if they also enroll in a plan available through their employers, if applicable. This cost control method is based on the premise that the employee plan will be secondary to the spouse's plan, thereby reducing costs.

Most employers using a spousal surcharge require an employee who enrolls a spouse in the plan to pay the surcharge unless the employee can verify that the spouse is not eligible to enroll in his or her plan, is eligible but not allowed to participate for a particular reason, or is not employed. A spousal surcharge will apply only if the spouse declines coverage in his or her own employer's plan when eligible to enroll.

The difference between a spousal carve out and a spousal surcharge is that in the carve out the employer defines plan eligibility so that spouses are ineligible to participate if they are eligible for other employer-sponsored coverage. With the spousal surcharge, the employer will implement a surcharge for spouses who are eligible for other employer-sponsored coverage.

The two programs also have different Health Insurance Portability and Accountability Act (HIPAA) implications. When an employer implements a new spousal carve out rule and an employee's spouse becomes ineligible for coverage, the loss of coverage for the spouse will trigger a HIPAA special enrollment and would require the spouse's own employer to allow a special mid-year enrollment if the employer offers a group health plan and the individual is eligible for coverage. The implementation of a spousal surcharge, however, does not trigger a HIPAA special enrollment and would not require the spouse's employer to allow a midyear enrollment. Though the loss of coverage is a qualifying event for HIPAA purposes, the loss of eligibility due to a plan change is not a COBRA qualifying event for the spouse.

Spousal carve out and spousal surcharge programs may help reduce rising health care costs particularly for employers with generous plan provisions for dependent care and plans in which a significant portion of the enrolled population elects family coverage. Before implementing one of these plans, an employer needs to carefully consider several issues. Some states have laws and regulations that limit the design of spousal carve out and surcharge plan provisions. In many cases, these laws and regulations prohibit discrimination (e.g., sex or marital status discrimination) that can result from an employer adopting spousal carve out or surcharge language in a plan. An employer should check with its state insurance commissioner for any laws, regulations or public policy issues that may affect spousal carve out or surcharge, and consult with legal counsel, its insurance broker and its carrier before amending its plan.

An employer should also consider the administrative burden versus potential cost-savings, employee-relations issues and demographics of its workforce to determine what, if any, approach is appropriate for its organization.