The unintended consequences of spousal exclusions

Last July, in “The alternative to health plan spousal exclusions,” we discussed the growing spousal exclusion trend and shared a gentler, more efficient technique to consider. However, one year later, as EBN recently reported, the spousal exclusion trend continues to gain momentum.

Yesterday, a reader of last July’s essay reached out to me for advice. Let’s call her Katie. Her predicament underscores the unintended consequences and economic and societal challenges associated with spousal exclusion policies. Her situation is worth our careful consideration. Facts and circumstances:

1. Katie is a seasoned professional, works less than 30 hours per week and is insured via the group health plan offered by her husband’s employer.

2. This health plan features a rich plan design – the family deductible is only $500.

3. Meanwhile, Katie’s employer immensely values her talent and skills and has asked her to consider increasing her hours and the scope of her services. Katie enjoys her work and would like to accept this generous offer.

4. Katie’s employer offers group health coverage to all employees working 30 hours or more per week. This benefit is a high-deductible health plan featuring a $4,000 annual deductible for single coverage.

5. Meanwhile, Katie’s husband’s employer-sponsored health plan excludes all spouses that have access to employer-based coverage. This employer doesn’t charge a spousal surcharge – it flat out excludes all spouses with access to employer-based coverage from joining the plan. Thus, if Katie increases her hours, she’ll become eligible for her employer’s plan and must drop off of her husband’s plan.

Katie’s predicament: On the one hand, if she accepts her employer’s offer and increases her hours, she will increase her happiness, bring more value to her customers and increase her income. On the other hand, her income increase could be wiped out by the increase in the health plan deductible of $4,000.

In short, Katie’s husband’s employer has indirectly presented Katie with a strong economic incentive not to increase her hours.

As a managerial economics major with free-market leanings, I have mixed emotions about this situation:

• On the one hand, Katie’s husband’s employer has every right to essentially exclude working spouses from its health plan. The Affordable Care Act, after all, implicitly endorses this arrangement via the employer shared responsibility rules.

• On the other hand, I’m generally opposed to policies that incentivize individuals desiring to work to stay out of the workforce or to work less than they naturally desire. Individuals who enjoy their life’s work should be free to pursue happiness without restriction. The unrestricted pursuit of happiness benefits the individual, our economy and our society.

• Moreover, while I’m constantly reminding my kids that life is not fair, the notion that the spouses of the CEO, CFO and general counsel at Katie’s husband’s company could be eligible for the health plan, while Katie is excluded, seems patently unfair.

Meanwhile, while this spousal exclusion policy could be producing macro-level savings for this employer, specific to Katie’s situation, it’s cost neutral. The policy itself is creating the incentive for Katie to remain on this employer’s plan indefinitely. Specific to Katie’s situation, the policy is not creating any financial benefit to the employer, while simultaneously incentivizing Katie to not increase her happiness.

What are some alternative strategies this employer could consider in lieu of excluding working spouses?

1. This employer’s $500 family deductible is much lower than the benchmark. For example, per the 2015 Kaiser Family Foundation/HRET Survey of Employer-Sponsored Health Benefits, the average family deductible for PPO plans is about $3,000 for small firms and $1,700 for large firms. See page 131 - http://files.kff.org/attachment/report-2015-employer-health-benefits-survey. Thus, this employer could pursue cost savings by modernizing its plan design.

2. The employer could examine the strategy we shared in “The alternative to health plan spousal exclusions.” This strategy involves setting the employee premium contribution differential between single and employee-plus-spouse coverage at a rate that is higher than what an individual would pay, on average, for single coverage. Many employers have discovered that this logical adjustment gently encourages spouses to enroll in their own employers’ plans.

3. The employer could simply exclude all spouses from its plan, period. Of course, that blanket strategy might negatively impact an employer’s ability to attract and retain the talent it needs.

While all three of these alternatives could increase Katie’s costs, all three would eliminate the unintended consequence of this spousal exclusion policy. Katie would no longer be incentivized to compromise her pursuit of happiness.

Have you encountered other unintended consequences of spousal exclusion policies? Please let us know via the below comment section or via Twitter @zpace_benefits.

Thanks for reading this essay. Answers and feedback to the posted comments:

1. If an employer is interested in allowing market forces to gently encourage spouses to join their own employers’ plans, please evaluate the above alternative #2.
2. Under the present arrangement of Katie’s husband’s employer, if the CFO’s spouse, for example, elects not to seek employment, the CFO’s spouse may remain on the health plan.
3. If an employer decides that excluding spouses is in the company’s best interest, the employer may simply exclude all spouses, without caveat, as outlined in the above alternative #3.
4. Employers should consult their accountant and / or attorney before classifying an individual as an employee for certain work and then as a 1099 contractor for additional work.
5. Generally, employers enforce other employer spousal exclusions via an affidavit process. Having employees sign affidavits often opens the door to other unintended consequences, as you’ve likely heard.
6. Again, in Katie’s situation, the other employer spousal exclusion is not reducing the costs of Katie’s husband’s employer. The exclusion is creating an unnatural market incentive for Katie to remain on the plan, indefinitely. While other employer spousal exclusions remain a tool in the tool box, I would encourage employers to first consider alternatives #1, #2, & #3. Put another way, while, in a pinch, I’ve used a shovel to dig a hole for a post, I’d rather use a post hole digger. It’s the tool designed for the job.