Insurance carriers sometimes impose “participation requirements” that direct an employer to ensure that an organization will deliver a sufficient percentage of employee enrollment in its health plan before the carrier will issue the group policy. From the carrier perspective, requiring a minimum enrollment threshold ensures that the carrier is not exposed to adverse risk from the group, should only the least healthy seek to enroll. For plan sponsors with lower-paid workforces, a minimum participation rule often poses a serious impediment because various employees may wish to decline health coverage if required contributions meaningfully erode take-home pay.
An insurance carrier’s “participation” threshold gives rise to a natural question -- can an employer simply require all employees to participate in a health benefit plan? In other words, now that federal law requires that everyone hold health coverage, can an employer simply mandate payroll deductions for the employee’s portion of cost by making health plan participation a condition of employment?
• Market reforms: Federal health care reform law imposed landmark market changes that mitigate some of the historic “participation” problems.
A key market reform change (guaranteed availability) requires that carriers accept a group without imposing a participation requirement, subject to important new conditions. Specifically, the participation requirement is suspended solely: (1) for newly issued policies (not renewals), and (2) only available to plan sponsors during prescribed annual enrollment windows. And, while the participation burden is eased in this manner, carriers can still increase pricing for enrollments that fail to meet stated thresholds, effectively precluding employer purchase.
• Structure of the required offer: Federal law now imposes a mandatory health coverage offer obligation from all employers with 50 or more full-time and full-time equivalent employees. ACA regulations state that unless offered an effective opportunity to accept or decline coverage at least annually, the employer will not be treated as having been offered coverage for purposes of the mandate.
Consequently, imposing a health coverage enrollment requirement as a condition of employment generally conflicts with the mandate structure. One key exception does apply; ACA regulations allow an employer to mandate enrollment -- but only when pricing of the employee contribution for coverage is free or sufficiently low, and the health coverage itself is considered “minimum value.”
Under ACA, an employer may mandate enrollment only when:
(1) The coverage offer provides minimum value; and is either; free, or offered at a cost, for any calendar month, of no more than 9.5 percent (as indexed) of a monthly amount determined using the federal poverty level for a single individual for the applicable calendar year, divided by 12.
The federal poverty level benchmark is an extremely low number ($11,880 in 2016), and few employers happily forgo otherwise compliantly available contribution dollars by using such a low-cost contribution structure.
• Individual mandate penalty: Along with the employer mandate, ACA now requires that virtually everyone hold health coverage, or face a penalty of the greater of $695 or 2.5 percent of adjusted income. As even taxpayers with average incomes now start facing a penalty that nears the health insurance cost, more workers should begin embracing the employer coverage offer.
• Automatic enrollment: Although Congress recently rescinded ACA’s automatic enrollment provision; the concept still offers the potential for some relief. (The original rule would have required employers with 200+ employees to automatically enroll workers and keep health coverage in place unless the individual opts-out.) So, even though automatic enrollment is not a legal requirement, that design option remains available to employers subject to important advance notice and opt-out opportunities.
Some employers facing enrollment resistance problems may wish to consider a shift to automatic enrollment. The move not only expands health plan participation, but should reduce some of the administrative burdens associated with a traditional enrollment.
State Payroll Laws
State laws commonly impose broad paycheck protections. Generally, such laws require at least one affirmative election for payroll deductions. Although ERISA usually supersedes all state laws in the employee benefits zone, many state enforcement agencies disagree. Rather than challenge states with such rules, plan sponsors typically attempt to obtain some consent to enrolment, even if that only means enrollment is cited as a condition at the time of hire.
Fair Labor Standards Act (FLSA)
Employers with workers paid at or near the FLSA-imposed minimum wage should consider the law’s possible impact on payroll-deducted benefit plan designs. FLSA generally blocks an employer from requiring deductions from an employee’s wages if the deduction would reduce a worker’s hourly wage to less than the required legal minimum.
Certain deductions reducing the employee’s wages below minimum are allowed. For example, tax deductions and employee benefits costs - when voluntarily approved - may reduce an employee’s pay below the minimum wage. So, if the employee signs an employment agreement acknowledging that he must be a part of the company’s group health plan and will be responsible for paying his or her portion of the premiums through payroll deduction, then the individual has (at least arguably), contractually consented to wage withholding in a manner that may satisfy FLSA standards.
Also, remember that if an employer pays 100 percent of the employee’s health insurance contribution (thereby providing free coverage), FLSA concerns about authorized wage withholding disappear because the employer is not forcing the individual to use wages to pay for the health coverage.
Employers may need to consider the implications of mandating coverage if participants articulate specific moral objections to receiving such coverage. There are a number of court cases that examine employer obligations to honor reasonable objections to employment policies based on religious grounds. In such situations, the employer should document the objection, and weigh the consequences of enforcing the coverage mandate versus the possibility of defending a religious discrimination claim. (Obtaining legal counsel is advisable.)
Note that ACA’s individual mandate includes an exception shielding the taxpayer from penalty assessment when the person validly asserts a religious objection to holding the coverage.
An employer’s mandatory health insurance participation requirement may inadvertently trigger ERISA’s reporting and disclosure duties. The change to compulsory coverage requires an employer to issue a Summary of Material Modification (“SMM”) on an accelerated basis; an employer would have 60 days from the date the plan change was adopted to distribute an SMM explaining the change. Moreover, the employer will eventually have to add the change to the plan’s Summary Plan Description (SPD).
Of course, under circumstances where the employer is seeking to mandate coverage, notifying the workforce in advance, offering plenty of lead time, and communicating accurate information about the plan changes can only help the employer. Many organizations opt for a simple memorandum outlining the changes and highlighting the timing involved with transitioning the plan to a mandatory coverage rule, and adding specific consensual wording to the enrollment form above the employee’s signature block.
Mandatory health plan participation demonstrates how a variety of different applicable laws must be taken into account when considering plan design changes. And even beyond compliance with a hodge-podge of such laws, plan sponsors will also want to consider other factors, including labor relations and employee morale issues that may stem from any significant plan redesign.