Health Plan Premium Incentives and Surcharges Based on Vaccination Status

Last week, the FDA granted full approval to the Pfizer-BioNTech COVID-19 vaccine, which will now be marketed as Comirnaty, for individuals ages 16 and up. This announcement has caused some employers to consider imposing stronger measures to incentivize—and in some cases mandate—employees to get vaccinated.

Employers have already widely adopted vaccination incentives intended to promote workplace safety, such as additional paid time off, gift cards or cash awards, and relaxed masking and social distancing rules for vaccinated employees. More recently, many employers are also looking at protecting their health plan from the preventable high costs of covering COVID-19 treatment and hospitalizations by potentially implementing health plan premium incentives or surcharges based on vaccination status. For example, on August 25, 2021, Delta Air Lines announced that unvaccinated employees will face a $200 per month surcharge on their health insurance premiums beginning later this year.

Employers have significant flexibility to implement these types of policies, but they need to be aware of certain compliance and legal requirements that may apply. (We recommend reviewing our prior Alert for more information on the EEOC’s guidance regarding vaccination mandates and incentives.) In light of the increased interest in vaccination incentives tied to group health plans, we’ve outlined below many of the unique considerations implicated by that approach.

HIPAA Wellness Rules

Providing a premium incentive or imposing a penalty/surcharge is a type of wellness program subject to specific wellness rules under HIPAA’s nondiscrimination provisions. While employers may be able to argue that receiving a COVID-19 vaccine is a participatory wellness program, the more conservative approach would be to treat this as a health-contingent, activity-only program, since health status may prevent some individuals from participating and earning the incentive. [Update: regulators have confirmed it is correct to treat these as health-contingent activity-only programs.]

As a health-contingent program, the following rules would apply:

• The employer must offer a reasonable alternative standard or waive the requirement for those who cannot participate due to health status
  • For example, the employer might waive a surcharge for someone with an allergy to an ingredient in the vaccine
  • As another example, the employer might extend the deadline for someone who recently had Covid-19 so they can wait the medically recommended 90 days following recovery to then secure their vaccine
• The employer must provide notice of the availability of the reasonable alternative standard (which can be as simple as adding a statement in the incentive announcement explaining that employees can contact the employer to discuss an alternative if needed)
• The incentive/surcharge must be limited to no more than 30% of the total cost of coverage (including employer contributions) when combined with all other health-contingent incentives already offered (such as for non-tobacco users)
  • If only the employee can participate in the wellness program, then the limit is based on the cost of employee-only coverage, but if the employee and any class of dependents (such as spouses) may participate, then the reward can be based on the cost of coverage in which the employee and dependents are enrolled

ADA Wellness Rules

The most recent EEOC guidance indicates that if the vaccine is obtained from a third party unrelated to the employer (which is how most individuals are obtaining a vaccination today), it may not be subject to the EEOC rules at all, and there is broad flexibility for the employer to provide an incentive as desired. However, if the employer administers the vaccines directly or coordinates an onsite vaccination clinic, then it may be necessary to follow EEOC wellness rules, including providing confidentiality notices, limiting incentives to “voluntary” levels so as not to be perceived as coercive, and providing reasonable accommodations to those who cannot participate due to a disability.

ACA Affordability 

This type of HIPAA wellness surcharge will count against affordability. Applicable large employers (ALEs) cannot use the discounted rate in determining affordability, but must use the non-discounted rate. Employers with limited flexibility in their affordability calculations may need to structure such an incentive program as a reduction in existing premiums for vaccinated employees (rather than imposing an additional surcharge for unvaccinated employees) to stay within ACA affordability safe harbors.

State and Local Laws

A few states have passed regulations that prohibit certain employers from discriminating in the workplace based on vaccination status. In such states, an incentive or surcharge may not be acceptable. Employers should work with counsel to ensure any vaccination policies or incentive programs comply with all applicable local restrictions.

Privacy/Confidentiality

An employee’s vaccination status is considered confidential medical information, and the ADA requires that employers keep such information confidential and stored in a file or record that is separate from the employee’s regular personnel file. Additionally, if an employer’s vaccine program is itself a group health plan, then HIPAA privacy and security requirements may apply as well, which could limit how the information collected may be used or disclosed.

Cafeteria Plan Issues

When a premium incentive or surcharge is implemented mid-plan year, employers will need to determine whether the difference in premiums is a “significant” cost change that would warrant allowing affected employees to drop to a lower-cost plan, or if already enrolled in the least expensive plan, to drop the medical plan altogether without access to COBRA.

Eligibility and Coverage Restrictions/Exclusions

While mandatory vaccination policies and incentives or surcharges tied to vaccination status in the form of a wellness program are generally permitted, we recommend that employers do not condition eligibility for group medical plans based on vaccination status.

HIPAA nondiscrimination rules broadly prohibit discrimination based on health status or a health factor. “Receipt of healthcare” is considered a health factor under the HIPAA rules, and vaccinations likely fall in that category. Therefore the employer should not exclude individuals from participating in the employer’s group medical plan or limit coverage levels (e.g., for COVID-related treatment) for employees or their family members who are not vaccinated.

Some employers have inquired about discontinuing coverage for COVID-19 treatment for all participants due to the high costs of hospitalizations for unvaccinated individuals. While the FFCRA and CARES Act only require health plans to cover COVID-19 testing and vaccinations (not treatment), employers should keep in mind that even vaccinated individuals occasionally have breakthrough infections that lead to hospitalization, particularly when immunocompromised. Eliminating coverage for COVID-19 treatment would expose those individuals to significant risk.

Practical Considerations

In addition to the legal requirements outlined above, there are many other issues employers may want to consider before implementing a premium incentive or surcharge based on vaccination status:

• Timing – Employers should determine how long employees will be given to become fully vaccinated before any surcharges are imposed and provide employees sufficient notice of those deadlines. Keep in mind that both the Pfizer-BioNTech and Moderna vaccines require two doses administered three and four weeks apart, respectively, while the Johnson & Johnson vaccine is only a single dose. Employers hoping to apply any premium incentives/surcharges for plan years beginning 1/1/22 will need to act quickly to provide enough notice before open enrollment.
• Boosters – The CDC recommends that immunocomprised individuals receive a booster shot at least 28 days after the second dose of the Pfizer-BioNTech or Moderna vaccine, and boosters are likely to be approved later this year for other individuals eight months after the second dose. Employers should consider whether these boosters will be required (once approved) in order to be considered “fully vaccinated,” and if so, how they will track individual vaccination dates for each employee.
• Verification – What documentation will employees need to provide in order to prove their vaccination status? Many employers are relying on written attestations from employees, while others are requiring employees to submit copies of vaccine cards or other official records.
• Administration – Will a premium incentive or surcharge require any updates to the employer’s payroll or benefits administration systems?
• Fraud – How will the employer deal with questionable vaccination records or requests for accommodation from employees? These are sensitive issues that could lead to discrimination claims or litigation, so we recommend engaging counsel before denying any incentives or accommodation requests based on concerns of misrepresentations.
• Union Issues – If an employer has workers operating under a collective bargaining agreement, they will need to consider any provisions in those agreements that might affect their vaccination policies or incentives, including whether any additional notices or bargaining are required.
• DEI Alignment – Some studies indicate that vaccination rates are lower among low-income and minority populations. Employers should analyze the effects that any vaccine policies might have on their DEI initiatives.
• Employee Relations Concerns – Given the highly politicized climate surrounding the COVID-19 vaccine, a significant premium incentive or surcharge could lead to backlash from employees. Employers will need to consider employees’ general attitudes towards vaccination policies and other COVID-19 restrictions in the workplace, as well as the potential impacts on recruitment and retention efforts.

There is not likely to be a one-size-fits-all approach to this issue that will make sense for every employer. If you have any questions about your vaccination policies or incentives, please contact your IMA Benefits team for assistance.

This material should not be considered as a substitute for legal, tax and/or actuarial advice. Contact the appropriate professional counsel for such matters. These materials are not exhaustive and are subject to possible changes in applicable laws, rules, and regulations and their interpretations.