Spouse & Dependent Benefit Eligibility

Employers may be required by applicable state or federal statutes and regulations to provide coverage to members of their employees’ families in addition to their employees. Even where coverage is not mandated, providing benefits for an employee’s spouse and dependents is an effective employee attraction and retention strategy in competitive workforce marketplaces. The extent to which a plan will offer spouse and dependent benefits should be informed by limitations within underlying carrier or stop-loss carrier contracts.

Plan sponsors routinely balance these and other considerations with cost containment strategies when constructing plan design. Every employee welfare benefit plan should formally document spouse and dependent eligibility provisions within plan documentation regardless of the extent to which such coverage is offered. Finally, plan sponsors should strive to strictly adhere to these provisions to avoid unnecessary financial and legal risk.

Plan Documentation

Plan sponsors have broad control over which spouses and dependents are eligible for their employee welfare benefit plans. Generally, eligibility is extended to categories of spouses and dependents by including them in plan documentation. ERISA requires plan sponsors to follow the terms of the plan document and summary plan description (SPD). Further, the SPD is required to include eligibility language. Non-ERISA plans are still maintained and administered pursuant to a formal document, which should outline eligibility requirements for spouses and dependents similarly.

Plan sponsors who utilize a wrap document encompassing multiple benefit options should ensure eligibility language is accurate, especially if differing eligibility provisions apply depending on the benefit. However, plan documentation should never include eligibility provisions that are broader than carrier/stop-loss carrier language, as the plan sponsor could be responsible for the claims of an ineligible spouse or dependent if denied by the carrier or stop-loss carrier. On the other hand, it should generally be possible to narrow eligibility provisions included in carrier provided documents through the use of a wrap document (e.g., attaching a spousal carve out provision to a plan that otherwise extends coverage to all legal spouses).

Similarly, exposure to risk for claims responsibility exists when a carrier/stop-loss carrier defines spouse and dependent eligibility by referring to a plan sponsor’s eligibility provisions, and the plan sponsor offers coverage to categories of spouses and dependents outside of these provisions. Failure to strictly enforce eligibility criteria as outlined in plan documentation can also lead to individuals claiming to be eligible based on the plan’s terms in operation.

Common Dependents

Employee welfare benefit plans most commonly permit individuals within the spouse and child categories (as outlined in the graphic below) to be enrolled as eligible dependents. The grandchildren, parents, and tax dependents of an eligible employee are the most common examples of additional eligible dependents. The below illustrates many of the relationships that could potentially be included as eligible dependents, if the carrier agrees, but is not a comprehensive list of all possible dependent categories. It should also be noted that tax dependency status does not necessarily equate to benefit plan eligibility.

Eligibility Verification

There is no federal requirement for employers to obtain verification of dependent status; the employee’s attestation of the relationship is adequate unless the employer has reason to question the relationship. If a plan sponsor chooses to require employees to provide proof of dependent status, they can also define the acceptable methods employees must utilize to prove they fit the plan’s definition of an eligible dependent (e.g., birth certificates, marriage certificates, notarized statements). Ideally plan sponsors will have any such formalized dependent verification requirements within plan documentation.

Sponsors of self-insured major medical plans should request spouse and dependent social security numbers (SSNs) or tax identification numbers (TINs) upon enrollment to ensure compliance with §6055 coverage reporting requirements (Forms 1095-B and 1095-C).

Employers at times choose to complete dependent eligibility audits to ensure that only those spouses and dependents who meet the plan’s definitions are enrolled. If an employer determines that an ineligible spouse or dependent is enrolled in the plan, they may terminate the individual’s coverage and terminate the employee’s pre-tax election to pay for the coverage. Coverage can be terminated prospectively, but retroactive terminations are subject to ACA “no rescission” rules. Under these rules coverage can only be terminated retroactively if the enrollment is the result of fraud or intentional misrepresentation, or in certain circumstances where adequate payment has not been made. As not every ineligible dependent is the result of fraud or intentional misrepresentation, each situation must be evaluated individually to determine if retroactive termination is permitted. A dependent terminated due to an eligibility audit may or may not be entitled to COBRA. Dependents who were never eligible will generally not be entitled to COBRA, whereas a dependent who was previously eligible but lost eligibility might be entitled to COBRA depending on the dependent’s relationship to the employee, the reason eligibility was lost, and when eligibility was lost.

Benefit Taxation

As a general rule, employers should consider any benefits, gifts or compensation provided to employees, whether for their own benefit or a family member’s, as taxable income under the federal tax code unless it is specifically addressed as tax-free in the law. Tax-favored benefits can generally only be made available to employees and former employees, their legal spouses, tax dependents, and in some cases children under a certain age, even if they are not tax dependents.

It should be noted that even if a category of dependents is not eligible for tax-favored benefits, a plan sponsor could still decide to provide coverage for that category (e.g., domestic partners). If coverage is provided to domestic partners, or any other individuals not eligible for tax-favored benefits, it must be treated as taxable to the employee. This will generally require taxing both the employer and employee contributions toward the coverage, or any reimbursement provided to the dependent under the benefit.

Spouse Considerations

There is no federal requirement to offer coverage to an employee’s spouse. However, most employee welfare benefit plans include coverage for spouses. Most plans utilize the broad term “legal spouse” when defining eligibility for an employee’s adult partner. When this is the case, both same-sex and common-law spouses will be considered eligible without further explanation within plan documentation.

Although most states do not allow common-law marriages, states generally recognize any valid marriage according to the laws of the state the marriage was established. So even if the state in which the employer is based does not recognize common law marriages, an employee who entered into a valid common law marriage in a state that recognizes such marriages would be considered legally married and thus eligible to enroll their spouse on the plan. A plan could potentially exclude common-law spouses if plan documentation is specifically drafted to exclude common-law spouses.

All states recognize same-sex marriages. To avoid sex discrimination allegations, plan sponsors are advised against drafting plan language to exclude same-sex spouses.

Divorce & Legal Separation

Once an employee is divorced, their ex-spouse is no longer the employee’s legal spouse and therefore no longer eligible for coverage under the plan. Unless the plan documents specifically state ex-spouses remain eligible for coverage, the ex-spouse should be removed from the plan as soon as the employer is aware of the divorce and COBRA or state continuation should be offered where applicable.

Employees going through a divorce will often contend their divorce decree requires they continue to cover their ex-spouse on the employer’s plan. This is almost never the case – while the decree may require the employee to provide coverage for the ex-spouse, the court generally cannot order an employer plan to provide coverage to the ex-spouse if the ex-spouse does not meet the plan eligibility requirements. Instead, the employee may have to elect and pay for COBRA or state continuation coverage if available, or help pay for coverage elsewhere (e.g., through the ex-spouse’s employer’s plan or through individual Marketplace coverage).

Legal separation is not the same as divorce. It is a formal legal status that adjudicates certain aspects of the relationship between the spouses without granting a divorce. Employees are not “legally separated” merely because they have started a divorce proceeding or have decided to live apart. Following a legal separation, individuals are still married and still have a legal spouse. As most plans broadly include “legal spouses” as eligible dependents, legal separation is typically not an event that would result in a loss of eligibility, unless the plan documents specifically state legally separated spouses are not eligible for coverage (and then only if a court has formally designated the individuals as legally separated).

Child Considerations

Virtually all plans cover biological children, adopted children, and stepchildren. However, even plan sponsors that limit eligibility to these basic categories of dependents will need to make certain decisions. For example, plans may permit expedited eligibility for children placed for adoption with an employee before the adoption is finalized. In addition, plans should be aware of which events will cause a loss of eligibility for a stepchild. While a divorce will clearly end the stepchild relationship, plans should decide whether the death of a stepchild’s biological parent would be considered a loss of dependent status for the stepchild. Finally, plan sponsors should be aware that the biological children of employees will be eligible regardless of whether the child’s parents are married or living together or have any sort of relationship themselves.

Disabled Adult Children & Legal Guardianship

While many plans provide coverage for disabled children beyond age 26 (see below) or children for whom the employee is a legal guardian, they are not required to do so. Because such coverage is not required, the criteria the plan uses to establish when such children are eligible for coverage will vary from plan to plan.

If a plan sponsor decides to cover additional categories of dependents, they should ensure that plan documentation accurately reflects the plan sponsor’s intentions and provides sufficient information to determine whether a specific individual meets the plan’s definition of an eligible dependent. For example, when it comes to disabled adults, a plan may condition eligibility on factors such as the dependent’s ability to work, primary source of support (e.g., social security, the employee, etc.), the dependent’s principal residence, or the dependent’s social security disability determination.

These factors can also be relevant in the determination of whether an employee should be permitted to add an individual as a dependent when the employee is considered the individual’s legal guardian. Moreover, different states offer a variety of different types of custody arrangements, both formal and informal, that go by a variety of different names, not all of which may qualify as a legal guardianship within the meaning of the plan. In some cases, employees may take custody of a child without any formal legal proceedings (often referred to as in loco parentis) which is usually not a legal guardianship. Further, plan sponsors should not assume that legal guardianship results in eligibility as legal guardianship is not the same as formal custody. It will often be necessary to ask the employee to produce the court order or other legal documents they claim grant them custody or guardianship of the child to evaluate if the relationship meets the requirements of the plan to enroll the child as a dependent.

Finally, in many states, legal guardianship automatically terminates when a child turns age 18. This can be confusing because the plan documents will often say a child for whom the employee is legal guardian can remain on the plan until age 26. However, if the guardianship is no longer active, then there may simply be no basis for the child to remain on the plan despite being under age 26.

Age 26 Mandate

The ACA requires major medical plans that offer coverage to dependents to offer coverage until dependents turn 26. The mandate does not require employers to offer dependent coverage, however, any eligible child within the Code §152 definition (biological, adopted, step, and foster) is subject to the mandate. Further, employers are prohibited from defining eligibility for dependents on anything other than the dependent’s relationship to the employee. For example, the eligibility rules could not impose requirements such as those in regard to support, residency, marital status or eligibility for other coverage.

Employer Mandate

Applicable large employers (ALEs) who fail to offer minimum essential coverage to at least 95% (or all but 5, if greater) of full-time employees and their dependent children (under 26 years) could be subject to employer shared responsibility penalties under §4980H. For purposes of the employer mandate, stepchildren, foster children, and certain children who are non-U.S. citizens or nationals are not included.

Summary

Although plan sponsors have broad control over the categories of spouses and dependents who are eligible for their welfare benefit plans, they must accurately reflect the plan’s eligibility provisions within plan documentation and adhere to those policies. The plan’s eligibility provisions should take into account federal, state, and carrier requirements (if applicable). Failure to strictly adhere to benefit eligibility requirements when it comes to spouses and dependents can result in financial and legal risk for the plan sponsor.

Apex Benefits is not a law firm and cannot dispense legal advice. Anything contained in this communication is not and should not be construed as legal advice. If you need legal advice, please contact your legal counsel