Question: What are the main employer considerations when responding to requests to enroll an ineligible dependent in the health plan?

Short Answer: The main concerns are the scope of the ERISA plan precedent created by permitting ineligible dependent coverage and the insurance carrier or stop-loss provider refusing to cover claims for the ineligible dependent.

Note: This is the fifth in a multi-part series addressing employee health plan exception requests.

Part I: Mid-Year Enrollment Requests Outside of Permitted Election Change Event

Part II: Ineligible Part-Time Employee Enrollment Exception Requests

Part III: New Hire Exception Requests to Enroll Prior to Satisfying the Plan’s Waiting Period

Part IV: Independent Contractor Exception Requests to Enroll Non-Employees in the Health Plan

Eligibility Exceptions: Ineligible Dependent Exception Requests

There are two main issues for employers to consider upon receiving a request to enroll an ineligible dependent in the health plan:

1. The ERISA Plan Precedent; and

2. The Insurance Carrier Limitations.

Issue #1: The ERISA Plan Precedent

Employer-sponsored group health plans almost uniformly limit eligibility for coverage to:

• Eligible employees (hours/week threshold to qualify);

• Spouse/domestic partner; and

• Children under age 26

With respect to domestic partners, fully insured plans in some states are required to offer coverage to at least registered domestic partners. Many plans also provide additional coverage to those meeting the employer’s qualifications for a domestic partner, typically referred to as “company-defined domestic partners.”

For more details, see:

• Registered Domestic Partners and Company-Defined Domestic Partners

• Newfront Office Hours Webinar: Health Benefits for Domestic Partners

With respect to children, most plans include coverage for biological children, stepchildren, adopted children (including legally placed for adoption), and foster children to age 26. Some plans also extend dependent eligibility to children under age 26 for whom the employee is a legal guardian, and to disabled adult children beyond age 26.

For more details, see:

• The ACA Age 26 Child Coverage Mandate

• Health Plan Eligibility for Legal Guardianship Children

• Post-Age 26 Coverage for Disabled Children

Although in theory employers could expand dependent eligibility beyond those standard categories, for multiple reasons (including insurance carrier and stop-loss provider limitations) group health plans are almost universally designed with no alternative categories of eligible dependents.

Nonetheless, employers frequently face requests from employees to enroll “dependents” based on a different type of relationship status. For example, employees often request to enroll parents, grandparents, siblings, nieces/nephews, cousins, tax dependents, or other ineligible children or relatives who do not meet any of the conditions described above. These individuals are not eligible dependents (regardless of tax dependent status), and therefore the health plan does not permit their enrollment.

Important Note Regarding Tax Dependents: Tax-dependent status generally is not relevant for determining eligibility for the health plan. It is relevant only for tax purposes and determining whether the employee can reimburse out-of-pocket medical expenses from an account-based plan (FSA/HRA/HSA). Employees often incorrectly believe that representing an otherwise ineligible dependent as a tax dependent will permit enrollment of the individual in the health plan.

For more details, see:

• Why Parents are Not Eligible for the Health Plan

• Health FSA and Dependent Care FSA for Parents

ERISA requires that employers administer and maintain the plan pursuant to its written terms, including its eligibility requirements. Within this framework, employers should not make “exceptions” to act contrary to plan terms because doing so could be a breach of fiduciary duty. Rather, employers may exercise their discretionary authority to interpret plan terms when making a plan eligibility determination. Employers that permit alternative dependent enrollment have therefore interpreted the plan’s terms to be flexible enough to accommodate the expanded dependent eligibility.

A broad interpretation of the plan’s terms beyond their standard denotation to permit the alternative dependent enrollment effectively acts in the same manner as a plan amendment because the employer must apply that approach consistently for all similar situated employees. For example, an employer permitting an employee to enroll a parent (as a purported “one-off” to address a health concern) would generally have to accommodate requests from all other employees making the same types of parental coverage requests.

In other words, health plan dependent eligibility “exceptions” create an ERISA plan precedent requiring the plan to offer the same alternative dependent coverage for all employees in similar circumstances.  An employee denied the ability to enroll the same type of dependent in similar circumstances would have a potential claim for ERISA breach of fiduciary duty or claim for benefits.

Summary: Granting any such dependent exception request would expose the employer to potential litigation risk because ERISA requires that employers administer and maintain the plan pursuant to its written terms.

• For more details, see our Newfront Office Hours Webinar: ERISA for Employers.

How to address the issue: _Unfortunately, there is no good way to solve for the unavoidable establishment of an ERISA plan precedent. The only mitigating factor could be an argument as to the scope of the precedent. How broadly or narrowly the precedent applies in practice is a matter of interpretation based on the specific facts and circumstances of the exception. Employers should keep in mind that an aggressive argument as to the narrowness of the precedent’s scope could always be challenged by the DOL or a participant lawsuit if it were unreasonable. Accordingly, the plan precedent derived from permitting a dependent eligibility exception will always be a thorny concern that is difficult to manage. _

Issue #2: The Insurance Carrier Limitations

Insurance carriers (and stop-loss providers for self-insured plans) generally will pay claims only for employees and dependents who are eligible and properly enrolled pursuant to the terms of the applicable insurance policy.

Carriers will in most cases permit coverage only for the standard categories of dependents described above. These carrier restrictions are crucial to (among other reasons) avoid significant adverse selection issues for the carrier.

If an insurance carrier or stop-loss provider were to discover that an employer made an exception to permit an employee to enroll an ineligible dependent, the carrier would be within its right to deny paying (or reverse payment for) all claims for that dependent. That would ultimately likely make the employer responsible for self-funding all claims incurred by the dependent—which is the worst-case scenario of potentially unlimited liability that employers must avoid.

How to address the issue: It is crucial that the insurance carrier (or stop-loss provider) agree to cover the alternative dependent if the employer wants to make an exception. The carrier is well within its right to deny the exception request, and it generally will do so. Note that even in the rare situations where the insurance carrier approves the exception, the carrier does not have the same concerns as the employer regarding the need to consider the scope of the ERISA plan precedent (issue #1 above) because the carrier is not responsible for that issue. Employers (as the ERISA plan administrator) will often incorrectly assume that the green light from the carrier absolves them of any additional concerns arising from ERISA compliance.

Alternative Approach: Additional Taxable Compensation

Employers can provide additional taxable cash compensation (e.g., a raise or bonus) to assist employees in purchasing an individual policy for ineligible dependents.

The ACA prohibition on reimbursement of individual policy coverage (outside of an ICHRA) requires there not be any conditions associated with those funds. To avoid creating a prohibited employer payment plan under the ACA, the employee must have an unrestricted right to receive the taxable funds as cash, cannot be required to use the additional compensation to purchase health coverage, and cannot be required to substantiate the purchase of individual market coverage.

Summary

For the reasons outlined above, employers should avoid making health plan eligibility exceptions to enroll ineligible dependents. The issues associated with making an exception in most cases far outweigh the typical hardship case or other motivation presented by the employee requesting the dependent eligibility exception.

Employers can always provide additional taxable cash compensation (e.g., raise or bonus) to assist employees in purchasing an individual policy for ineligible dependents if there are no conditions associated with those funds.

Relevant Cites

ERISA §402(a)(1):

(1) Every employee benefit plan shall be established and maintained pursuant to a written instrument. Such instrument shall provide for one or more named fiduciaries who jointly or severally shall have authority to control and manage the operation and administration of the plan.

ERISA §404(a)(1)(D):

(1) Subject to sections 403(c) and (d), 4042, and 4044, a fiduciary shall discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and—

…

(D)** in accordance with the documents and instruments governing the plan** insofar as such documents and instruments are consistent with the provisions of this title and title IV.

IRS Notice 2015-17:

Question 4 (Increases in employee compensation to assist with payments of individual market coverage): If an employer increases an employee’s compensation, but does not condition the payment of the additional compensation on the purchase of health coverage (or otherwise endorse a particular policy, form, or issuer of health insurance), is this arrangement an employer payment plan?

Answer 4: No. As described in Notice 2013-54, an employer payment plan is a group health plan under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy or directly pays a premium for an individual health insurance policy covering the employee, such as arrangements described in Rev. Rul. 61-146. The arrangement described in this Q&A-4 does not meet that description. In addition, because the arrangement described in this Q&A-4 generally will not constitute a group health plan, it is not subject to the market reforms.4 Providing employees with information about the Marketplace or the premium tax credit under Code § 36B is not endorsement of a particular policy, form, or issuer of health insurance.

IRS Publication 969:

Distributions From an FSA

…

Qualified medical expenses are those incurred by the following persons.

1. You and your spouse.

2. All dependents you claim on your tax return.

3. Any person you could have claimed as a dependent on your return except that:- The person filed a joint return;

• The person had gross income of $4,300 or more; or

• You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s 2021 return.

1. Your child under age 27 at the end of your tax year.

Distributions From an HRA

…

Reimbursements under an HRA can be made to the following persons.

Current and former employees.

Spouses and dependents of those employees.

Any person you could have claimed as a dependent on your return except that:

The person filed a joint return;

The person had gross income of $4,300 or more; or

You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s 2021 return.

Your child under age 27 at the end of your tax year.

Spouses and dependents of deceased employees.

Distributions From an HSA

…

Qualified medical expenses are those incurred by the following persons.

1. You and your spouse.

2. All dependents you claim on your tax return.

3. Any person you could have claimed as a dependent on your return except that:- The person filed a joint return;

• The person had gross income of $4,300 or more; or

• You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s 2021 return.