In light of the lingering COVID-19 pandemic and its impact on employee productivity and health care expenses, employers are considering imposing a premium surcharge on employees participating in the company’s health plan who are not vaccinated against COVID-19.

As we have discussed , several federal laws must be taken into consideration when designing such a surcharge including the Affordable Care Act (ACA), the Americans with Disabilities Act (ADA), the Health Insurance Portability and Accountability Act (HIPAA), and wellness rules.  As employers engage in the requisite legal analysis, the opening question is, “How much can the surcharge be?”

Health insurance coverage must still be “affordable,” as defined by the ACA

Under IRS regulations, when determining whether an employee’s cost of coverage is “affordable,” an employer generally may not consider any incentives offered under wellness programs.  The lone exception to this rule is a non-smoking incentive, where employers may use the premium amount for non-smokers in the affordability calculation. While the current administration’s policies point toward encouraging vaccination, at this time, there is no exception to complying with the ACA’s affordability rules for a vaccine surcharge.  As a result, health insurance must still be “affordable,” as defined by the ACA, or else penalties might apply, as we discussed earlier.

What is Affordable:  For plan years beginning in 2021, employer-sponsored coverage will be considered affordable if an employee’s required contribution for self-only coverage for the least-expensive plan option that meets ACA requirements does not exceed 9.83% of the employee’s household income for the year.  The IRS publishes the percentage rate each year; for 2022, the rate is 9.61%.  Because employers rarely have the household income information of their employees, the regulations under Internal Revenue Code Section 4980H provide three safe harbors under which an employer may determine affordability based on information readily available to the employer.

1. The federal poverty line safe harbor.  This safe harbor provides employers a predetermined maximum amount of employee contribution that in all cases deems the coverage to be affordable.  The federal poverty line is $12,880 for an individual in 2021. (The amount is slightly different for any employees in Hawaii and Alaska.)  That amount divided by 12 and multiplied by 9.83% equals an allowable premium of $105.51 for 2021.

2. The rate of pay safe harbor.  To calculate this amount, multiply 130 hours by the lower of (a) the employee’s hourly rate of pay as of the first day of the coverage period (generally the first day of the plan year) or (b) the employee’s lowest hourly rate of pay during the calendar month.

3. The Form W-2 wages safe harbor.  Application of this safe harbor is determined after the end of the calendar year and on an employee-by-employee basis, taking into account the Form W–2 wages and the required employee contribution for that entire year.

Total Surcharges Cannot Exceed 30 Percent

In determining the amount of a premium surcharge, employers must also consider the rule established under HIPAA (as amended by the ACA), which provides that it is allowable for employers to encourage participation in certain types of wellness programs by offering incentives of up to 30 percent of the total cost of an employee’s health insurance premiums for self-only coverage.  Thus, any surcharge imposed on an unvaccinated worker cannot be more than 30 percent of the total cost of an employee’s health insurance premiums for self-only coverage when combined with any existing surcharge.

What’s the Answer?

The allowable surcharge amount will vary for every employer depending on the cost of health insurance, any other surcharges or incentives under an existing wellness program, the level at which health insurance is currently subsidized, and the rate at which employees are compensated.