Average annual employer health plan costs currently range from $7,500-$9,000 per spouse. As health care costs continue to rise, employers are looking for solutions to help control them. One option for plans to reduce costs is to change how spouses are covered under the health plan, which can come in the form of using spousal surcharges or carve-outs. This blog outlines these strategies, legal concerns and best practices for implementation.

What is a surcharge?

A spousal surcharge adds an additional cost for employees covering their spouse in their employer-sponsored health plan when their spouse is eligible to be covered under their own employer’s plan. By increasing the cost of spousal coverage, employers seek to deter spousal enrollment, resulting in cost savings for the plan. Despite the cost increase, a spouse may still enroll in the employee’s health plan, and employers must make sure the cost of the surcharge does exceed the cost of spousal coverage.

What is a carve-out?

In a spousal carve-out, plan eligibility is designed to exclude a spouse from the employee’s group health plan when the spouse is eligible for their own employer’s health plan.

HR Professionals Magazine describes three common types of carve-outs: elimination of coverage for all employees’ spouses; excluding spouses with access to their own employer sponsored plan; and excluding spouses unless they enroll in their own employer’s plan first, with the employee’s plan providing secondary coverage.

Legal Compliance Considerations

No matter which approach an employer takes to manage spousal health plan expenses, considerations for legal and compliance requirements should always be addressed before changing the plan requirements.

Affordable Care Act (ACA)

The ACA impacts employer plans implementing spousal surcharges and carve-outs in a few ways.

• Pay or play rules do not apply. Under the pay or play rules, an applicable large employer who does not offer affordable, minimum value health coverage to full-time employees and their dependents may be subject to a penalty. However, the rules do not require employers to offer spousal coverage, so surcharges and carve-outs are permitted.
• Grandfathered plans beware. The Centers for Medicare & Medicaid Services says, “grandfathered plans cannot decrease the percent of premiums the employer pays by more than 5 percentage points” compared to what the employer contributed on March 23, 2010. If a spousal surcharge would reduce the employer’s contribution by more than 5%, the plan will lose its grandfathered status.
• Employer reporting on Form 1095-C. When a conditional offer of spousal coverage is made (e.g., the spouse is only offered coverage if they are not eligible for another group health plan), it must be reported on Line 14 of Form 1095-C, using Code 1J if coverage is not offered to nonspouse dependents or Code 1K if coverage is offered to nonspouse dependents.

State Laws

Some states prohibit discrimination based on marital status or sex, while others require certain spousal coverage, possibly impacting the legality of spousal surcharges or carve-outs. The Employee Retirement Income Security Act of 1974 (ERISA) generally preempts state laws for self-funded health plans, which would allow employers to use surcharges or carve-outs despite state laws. But if a plan is fully insured or is not subject to ERISA, the plan must follow state laws.

Medicare Secondary Payer (MSP)

Under MSP rules, employers with 20 or more employees must offer the same group health plan coverage to employees and spouses aged 65 and older that they offer to younger employees. Incentives may not be offered to Medicare-eligible participants to try to deter them from choosing the employer’s group health plan. Surcharges or carve-outs targeting Medicare-eligible spouses may create compliance issues.

Health Insurance Portability and Accountability Act (HIPAA) of 1996

If an employer implements a new spousal carve-out rule and an employee’s spouse is no longer eligible for the employer’s group health plan, the spouse’s loss of coverage will trigger a HIPAA special enrollment event, requiring the spouse’s employer to allow mid-year enrollment. However, HIPAA special enrollment rules do not apply to a new spousal surcharge, as there is no loss of coverage.

Section 125

Employers implementing spousal surcharges or carve-outs in their health plans must carefully consider nondiscrimination requirements and the rules governing mid-year election changes under Section 125.

• Nondiscrimination rules. Health plan coverage cannot favor highly compensated employees.
• Election changes. A spouse’s ability to make midyear changes to their employer-sponsored plan depends on the plan’s definition of allowable status-change events. Some Section 125 status changes are optional, so the rules may differ from one plan to another.

Consolidated Omnibus Budget Reconciliation Act (COBRA)

Though the loss of coverage is a qualifying event under HIPAA special enrollment rules as discussed above, the loss of eligibility due to a plan change (i.e., spousal carve-out) is not a COBRA qualifying event for the spouse. While some employers might want to offer COBRA coverage in this scenario, insurers or stop-loss providers may not allow coverage since this does not qualify as a true COBRA event.

Implementation Best Practices

Aside from legal compliance, employers should consider other best practices when implementing spousal carve-outs and surcharges.

• Clarify eligibility requirements. Clearly define who is a “spouse” (e.g., domestic partners, common-law partners) and what qualifies as “other coverage” (e.g., minimum essential coverage offered through a spouse’s own employer).
• Create verification procedures. Decide how to verify whether the spouse is eligible for other coverage. Some employers use:
  • An annual attestation or affidavit form (e.g., a signed statement certifying that the spouse is not eligible for other employer-sponsored coverage)
  • An eligibility audit (e.g., perform periodic audits to verify marital status and request certification from the spouse’s employer)
  • Other documentation from the spouse’s employer stating the spouse is ineligible for health coverage.
• Determine consequences of lying about spousal circumstances. Decide what, if any, actions to take if an employee does not answer an attestation or affidavit form truthfully. Consequences could include retroactive termination of spousal coverage, termination of employment, and recoupment of paid claims and premiums.
• Establish the surcharge amount. If using a surcharge, it is common to use a flat dollar amount. According to the International Foundation’s Employee Benefits: 2026 Survey Results, for those respondents that use a spousal surcharge, the average amount of the surcharge is $125 per month.
• Make exceptions. Decide whether to allow flexibility for surcharge or carve-out exemptions in certain situations (e.g., unemployed spouses, part-time spouses, spouse’s employer plan is unaffordable or offers less coverage).
• Examine contracts or collective bargaining agreements (CBAs). If making changes to spousal eligibility/employee contribution requirements, review existing CBAs to identify potential conflicts (e.g., mandated benefit levels), as CBAs often override plan document language.  
• Communicate with employees. Notify employees promptly about eligibility rules and verification steps to allow sufficient time to find other spousal coverage, if needed. Update employee handbooks and HR policies as changes occur.
• Update plan documents and summary plan descriptions (SPDs). If implementing a spousal surcharge or carve-out, update plan documents and SPDs to reflect new enrollment and eligibility rules.
• Consult legal counsel. Work with counsel to draft policies and procedures on administering surcharges and carve-outs to ensure compliance with state and federal laws.
• Coordinate with payroll and benefit systems. Make sure all systems capture spousal verification data, apply the correct surcharge and reassess spousal status during open enrollment every year.

Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.