The Sky Could Be the Limit on the Surcharge for Unvaccinated Workers

Employers weighing whether to follow Delta Air Lines’ lead and impose financial penalties on their unvaccinated employees could charge an unlimited amount…

Employers weighing whether to follow Delta Air Lines’ lead and impose financial penalties on their unvaccinated employees could charge an unlimited amount depending on the type of wellness plan they choose.

The airline said this week that it will institute a $200 monthly surcharge on health insurance premiums for employees who haven’t received a Covid-19 vaccine by November 1. Rather than imposing vaccine mandates, dozens of companies are contemplating similar surcharges on premiums, while others are taking a wait-and-see approach, according to employee benefits consultants and others who work on health insurance matters.

Delta’s move came in the wake of the Food and Drug Administration’s (FDA’s) full approval of the Pfizer-BioNTech vaccine and as Covid cases and hospitalizations have increased dramatically in recent months due to the highly transmissible delta variant. Each hospitalization comes with significant costs for employers. The airline said the average hospital stay for Covid-19 had cost it $50,000 per person.

“Federal employment law generally permits employers to mandate Covid vaccine or incentivize employees to get vaccinated,” Karen Pollitz, a senior fellow with the Kaiser Family Foundation, said in an interview. Under the Employee Retirement Income Security Act (ERISA) and the Affordable Care Act (ACA), employers can’t charge employees higher premiums for health benefits based on health status, but wellness incentives are an exception to those general non-discrimination rules, she said.

Any group health plan, whether self-funded or fully insured, has the option of using wellness incentives to vary premiums for health benefits based on vaccine status, said Pollitz, who authored a recent article on what employers can do to require or encourage workers to get a Covid vaccine.

Delta did not respond to a question about whether its surcharge was part of a wellness plan.

Wade Symons, national leader of the regulatory resources group and an employee benefits attorney at the benefits consulting firm Mercer, said some employers aren’t comfortable with vaccine mandates, and that’s where surcharges enter the picture. “They want to give at least the appearance of a choice by the employee.” he said.

Size of Allowable Surcharge Depends on Type of Wellness Plan

A major question that employers seeking to follow Delta’s model must answer is whether they institute surcharges as part of a health-contingent wellness plan or a participation-only wellness plan, Symons said in an interview. Health-contingent wellness programs typically require participants to achieve a specific health goal in order to obtain a reward. With a participation-only plan, no reimbursement or reward can be contingent upon any health outcome.

If a surcharge based on vaccination status is considered a health-contingent wellness program—“which certainly some out there are thinking that this is where it should fall”—there would be a limit on the surcharge equivalent to 30 percent of the premium cost of a health plan for an individual (not a family plan), Symons said. That would be based on the full cost of what the company and the employee, combined, pay for premiums. For example, if the company’s full cost of premiums for employee-only insurance coverage is $500 a month, the surcharge would be limited to 30 percent of that amount, or $150 a month.

But if the program is considered a participation-only plan, surcharges could be unlimited. That’s because employees who don’t get vaccinated wouldn’t be participating and could be subject to a surcharge beyond the 30 percent limit, Symons said.

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“It’s up to the employer to interpret whether one applies or the other,” Symons said. The distinction is important. “If you’re looking at a large surcharge that might go over that 30 percent limit, you’ve got to be comfortable that our interpretation is that this is participation-only versus health-contingent,” he said.

The Department of Labor has created a compliance framework under the Health Insurance Portability and Accountability Act (HIPAA) and the ACA for employers to be able to offer voluntary wellness programs with incentives or surcharges and avoid discrimination issues, Symons said. However, “Neither the DOL regulations nor the courts have provided employers with guidance as to whether getting a vaccine would be considered participation-only or health-contingent,” he said. “So employers are left to make that decision on their own, weighing the risk of noncompliance.”

The government could impose an excise tax of $100 per day per affected participant for failure to comply, and both the government and employees may bring lawsuits to enforce the rules, Symons said.

Already Underway in More Than 50 Companies

Mercer said it had discussed surcharges with more than 50 companies. The company declined to say whether it had advised Delta on the matter.

“I’m fairly certain that a number of employers will move from the discussion phase to the action phase, knowing that other employers are now doing it and obviously feel comfortable with the legal and employee relations considerations,” Symons said. He called the increase in conversations with employers since Delta’s announcement on August 25 “significant.”

Some employers want to add a modest increase to contributions to encourage employees to get vaccinated, Symons said. “Others see the surcharge as a way to offset high claims costs that those engaging in unhealthy behaviors are likely to incur.”

The employers looking at surcharges of $25 to $50 per paycheck generally fall into the former category, he said, while those weighing a “much larger” surcharge tend to fall into the latter. “If you are trying to offset $50,000 in potential Covid claims, you will likely need a substantial surcharge amount to do that. But we don’t see most employers thinking that way,” Symons said.

Employers contemplating a health plan surcharge for unvaccinated employees should consider the impact on lower-wage workers, Julie Stone, managing director of health and benefits for consulting firm Willis Towers Watson, said in an interview. “This is likely to disadvantage lower-wage workers,” Stone said. She said 22 percent of people in households with incomes under $25,000 are unvaccinated, compared with only 10 percent of people with household incomes of $100,000 and up.

Other companies will “probably watch and see what negative impact Delta has from doing that,” Mark Cunningham-Hill, medical director of the Northeast Business Group on Health, said of the surcharge. The NBGH, which represents employers on health plan issues, has about 170 member companies covering 6 million to 7 million people in New York, New Jersey, and Connecticut.

The chief concern would be losing employees in the tight labor market, he said. “Delta is ahead of the curve on this one.”

 

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