Some employers may be contemplating whether to offer a discount on healthcare premiums to vaccinated employees (or, put another way, implement a “premium surcharge” on unvaccinated employees who are participating in the employer’s group health plan) to encourage employees to obtain the COVID-19 vaccine. Many employers may be wondering whether such practice is allowed and what compliance concerns are associated with such an arrangement.

Though it may be surprising to some, these premium surcharges are permitted if they are a part of a Department of Labor (DOL) compliant wellness program. In this article, we explore the compliance considerations for premium surcharges and the potential benefits of encouraging vaccination.

Compliance Considerations

Employers have historically used wellness programs to charge different healthcare premiums to smokers and non-smokers, referred to as a “tobacco surcharge.” Similarly, employers can charge higher premiums for employees who do not obtain a COVID-19 vaccine if they comply with regulations governing wellness programs, including the HIPAA nondiscrimination rules, the Americans with Disabilities Act (ADA), the Genetic Information Non-Discrimination Act (GINA), and Title VII of the Civil Rights Act (Title VII).

  • HIPAA Non-Discrimination Rules: Generally, HIPAA prohibits group health plans from charging similarly situated individuals different premiums based on a health factor, except where an individual has met the standards of a DOL-compliant wellness program. The compliance standards that must be met depend on the type of wellness program, which can be categorized as a participatory program or a health contingent program (either activity based on outcome based). It is likely that a vaccine surcharge would be considered a health contingent activity-only wellness program because it would provide a reward for the completion of a health-related activity, i.e., a reward for obtaining the COVID-19 vaccine. As such, the HIPAA wellness regulations would require the vaccine surcharge to have an incentive limit, a reasonable alternative requirement, an annual opportunity for employees to earn the award/avoid the surcharge, and disclosure certain information to employees (as outlined below).
  • ADA: The ADA prohibits discrimination based on disability and restricts employers from obtaining medical information from employees except as a part of a voluntary employee wellness program. Based on recent DOL guidance, employers can offer incentives to employees to voluntarily provide documentation that they’ve received a vaccination and such documentation is not a disability-related inquiry covered under the ADA. On the other hand, if an employer offers incentives for employees to receive the vaccine directly from the employer and pre-vaccination disability-related questions are asked or if an employer questions “why” an employee cannot obtain a vaccination, then the ADA is implicated.
  • GINA: GINA prohibits discrimination based on genetic information and restricts employer medical inquiries about family members. Based on recent DOL guidance, employers can offer incentives to employees to provide documentation that they or their family members received a vaccination from their own health care provider without implicating GINA, as vaccination status is not information about family history or other genetic information covered under GINA. Employers can also offer an incentive to employees for voluntarily receiving a vaccination administered by the employer (or its agent) but cannot offer an incentive to an employee for their family members getting vaccinated by the employer because it would violate GINA.
  • Title VII: Title VII prohibits discrimination based on race, color, national origin, religion, and sex. Based on recent DOL guidance, employers must provide a reasonable accommodation for vaccination requirements based on a religious belief.

The compliance issues that employers must consider depend on the overall wellness plan design and the particulars of the incentive/surcharge. Based on the above regulations, some considerations employers will need to consider when implementing an incentive or surcharge include, but are not limited to, the following:

  • Reasonable Alternative Standard (or Waiver) for Medical Conditions:
    • HIPAA Non-Discrimination: Under HIPAA non-discrimination requirements, vaccine incentives must be available on a uniform basis for all “similarly situated individuals” and benefits cannot be limited or excluded based on a participant’s health factor. If some employees are not eligible to receive the vaccine due to a medical condition or other health factor, then the employer must offer a “reasonable alternative standard” that would allow these employees to avoid the surcharge, such as the completion of vaccination education or training. Alternatively, employers can waive the surcharge for these employees. In these situations, employers can require verification, such as a statement from the employee’s physician, that the employee’s health factor makes it unreasonably difficult or inadvisable to obtain the vaccine that would warrant the alternative standard or waiver.
    • Title VII Religious Exemption: If an employer is notified that an employee’s sincerely held religious belief, practice, or observance prevents them from getting a COVID-19 vaccine, the employer must provide a reasonable accommodation unless it would pose an undue hardship. A “undue hardship” is defined under Title VII as having more than minimal cost or burden on the employer.
  • Limit on Surcharge:
    • HIPAA Non-Discrimination: Under the current HIPAA non-discrimination rules, the surcharge must be limited to no more than 30% of the cost of single coverage (or 30% of family coverage if spouses and dependents can participate).
    • ADA: If an employer (or its agent) is providing the vaccination or an employer intends to ask employees “why” they need the reasonable alternative, then the employer would be asking disability-related inquiries subject to the ADA, in which case the surcharge could not be so great as to compel participation (in other words it must be deemed voluntary). Under the ADA, the surcharge must be limited to 30%, though it is important to note that previously withdrawn regulations limited incentives to a “de minimis amount.” Until new regulations are implemented, if the ADA is implicated, employers should take a reasonable approach in evaluating their program to ensure the program is truly voluntary for employees and that the incentive is not so large as to become coercive.
    • Affordable Care Act (ACA) Affordability: Applicable Large Employers “ALEs” (those with 50 or more full-time and full-time equivalent employees in the prior year) are required to offer affordable minimum value coverage to their full-time employees and their dependents. Affordability must be determined assuming that each employee fails to obtain the vaccine and is subject to the vaccine surcharge.
  • Disclosure Requirement:
    • HIPAA Non-Discrimination: Employers must disclose the availability of the reasonable alternative standard (or possibility of a waiver), contact information, and a statement that recommendations of a physician will be accommodated.
    • ADA: If the ADA is implicated, employers must also provide a notice that describes what information will be collected, the purpose for which it will be obtained, how it will be used, who will receive it, and how the information will be kept confidential.

In addition to encouraging the health and safety of employees, vaccination may also make financial sense for employers and employees. COVID-19 infections increase the likelihood of prolonged hospital stays, which are expensive for employees and for employer-sponsored health plans and may ultimately lead to an increase in plan premiums.

Conclusion

If an employer decides to move forward with a premium surcharge for unvaccinated employees, they must keep compliance top of mind when implementing such wellness program. Employers who want to go beyond incentives/surcharges can also consider mandating vaccination, though this route also comes with a set of additional compliance considerations. For more on incentives/surcharges and vaccine mandates, please see our prior article.

 Additional Resources

Emerald Law – Emerald is a Senior Compliance Consultant for Sequoia, where she works with our clients to optimize and streamline benefits compliance. In her free time, Emerald enjoys stand-up comedy, live music, and writing non-fiction.