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Compliance Issues for Firms Mulling Incentives, Penalties


Employers that plan to or have already introduced incentives or penalties to coax their workers to get vaccinated against COVID-19, have to prepare for likely paperwork and compliance challenges.

The Biden administration has made it easier to require employees to get vaccinated after it ordered Fed-OSHA to write regulations mandating that all employers with 100 or more employees require their workers to get vaccinated or submit to weekly testing.

But for firms considering incentives or penalties in the form of higher premium contributions for workers who don’t get vaccinated, there are three federal laws they will need to consider:

  • The Affordable Care Act (ACA),
  • The Employment Retirement Income Security Act (ERISA), and
  • Health Insurance Portability and Accountability Act (HIPAA) portability and wellness plan rules.

HIPAA portability rules

If you are planning to offer incentives for staff to get vaccinated or penalize those who don’t, you have to consider HIPAA rules concerning wellness programs.

The rules bar group health plans from discriminating against participants on the basis of a health factor, which experts say can include whether an employee has or has not received a vaccine.

That said, a program that conditions an incentive on a participant getting a vaccine would likely be classified as an “activity-only health-contingent program.” To qualify as such, the program must meet five requirements:

  • The maximum reward for all of the employer’s wellness programs may not exceed 30%;
  • The program must be reasonably designed to promote health or prevent disease;
  • Individuals must have at least an annual opportunity to qualify for the reward;
  • The reward must be available for all similarly situated individuals and must include a reasonable alternative standard for certain individuals who are not able to satisfy the standard; and
  • All materials that describe the terms of the wellness program must include a disclosure of the availability of a reasonable alternative standard (or the possibility of a waiver).

The key aspect that employers need to keep in mind is that they will have to offer a “reasonable alternative” to employees whose doctors say that the vaccine is not medically appropriate for the employee.

In those cases, the plan has to offer an alternative option that meets the doctor’s recommendations, or waive the requirement for that employee and provide the incentive.

Employer shared responsibility rules

One other way an incentive program could run into an issue is if the premium surcharge for employees that don’t get vaccinated requires them to pay more for their share of the health insurance premium than is permitted by the ACA.

The ACA’s employer shared responsibility mandate requires applicable large employers (those with 50 or more full-time workers) to offer coverage that is affordable. For 2021, that means the employee’s share of health insurance premium cannot exceed 9.83% of their household income for the taxable year.

If you surcharge employees, it may affect affordability and subject your firm to employer shared responsibility penalties. This issue would likely arise more with your lowest-paid employees.

ERISA implications

If you have a vaccine incentive or penalty that’s tied to your health plan, it could create a conflict with your ERISA plan and you would need to make changes to the plan documents to reflect those changes.

Once you’ve updated your ERISA plan documents, you would also be required to notify your staff of those changes, such as providing them with a summary of material modification or reduction.

Also, because the change could result in some employees paying more for their coverage, you would need to make sure your plan’s wording allows for plan election changes, if at all. In either case, you may need to amend your plan documents.

A final note

It’s advisable to talk to your counsel before implementing an incentive program.

You’ll want their input so that your program complies with the law and doesn’t create an affordability issue for any employees under the ACA, thus saving you from being hit with an employer shared responsibility mandate penalty.

You’ll also need to communicate changes to your covered employees and prepare to respond to requests for a reasonable alternative standard.