Insurance surcharges for unvaccinated employees: legal considerations

We must admit that the most important consideration for this topic is still in flux: the impact of various vaccine mandates that employers may need to enforce. When the idea for this article first came up, the concept of an employer vaccine mandate was relatively new. Some larger employers were experimenting with the idea, even without federal requirements to do so, or guidance on how to do so. Similarly, the idea of imposing a health insurance surcharge or other incentive was relatively new. Some employers who were contemplating such ideas carefully reviewed the legal concerts with counsel, including issues under Health Insurance Portability and Accountability Act (HIPAA) privacy and nondiscrimination rules, Americans with Disabilities Act (ADA) compliance issues, accommodations for religious beliefs and the looming specter of lawsuits from vaccine-hesitant employees.

Then, on September 9, the White House issued “The Path out of the Pandemic,” an action plan which, among other things, indicated an intent to establish a federal employer vaccine mandate. However, regulations implementing this plan have not yet been issued. Further complicating the matter, certain states (notably Texas) have recently taken steps to prevent vaccine mandates. It is very likely that future federal guidance will take a similar form to executive actions taken early in the pandemic, suspending the application of certain rules that create impediments to protective measures. Until additional guidance is issued, it is difficult to determine the scope and breadth of the relaxation of these rules will take. It is entirely possible that the restrictions described below will be temporarily eased, but certain structures are currently permissible under existing guidance.

For employers who are hesitant to establish a vaccine mandate, incentivizing vaccination with a welfare plan associated with employer sponsored health benefits may be an option. Existing rules appear to provide a roadmap for implementing such programs. Welfare benefits provide for more favorable premium structures (e.g., discounted rates) for individuals who meet the requirements. Note that it is also possible to structure the program as a surcharge on unvaccinated individual. The rules described in this article apply regardless of the manner the “reward” is implemented, however, imposing a surcharge can have the added effect of increasing the cost of the company’s health insurance plan for purposes of determining affordability under the Affordable Care Act.

The primary guideline that employers should consider is the HIPAA Title I “wellness program” rules. Although HIPAA generally refers to the privacy and security requirements (which may also be a concern, depending upon how the program described below is implemented), the law also provided for other restrictions and rules governing employer sponsored health benefit plans. These rules originally took the form of regulations issued under Employee Retirement Income Security Act (ERISA), however, the Affordable Care Act essentially codified those rules in 2014. In general, the rules provide for restrictions on rewards (or penalties) associated with a “health status-related factor.”

The nature of the restrictions that apply is dependent upon whether the reward is contingent upon an activity-only (e.g., filling out a health questionnaire) or an outcome (e.g., losing a specified amount of weight). Restrictions are much more significant for wellness programs that require a particular outcome.

Although it seems likely that obtaining a vaccine would be considered a health status-related factor, the requirement to receive the vaccine (and not, for example, test negative for COVID) would be an activity-only wellness program.

    1. The program must give individuals eligible for the program the opportunity to receive the discount under the wellness program at least once per year.

As noted below, additional concerns would exist if the employer itself provides the vaccine. Obviously, individuals will be able to obtain a vaccine from third parties at any time. However, it is important to note that this requirement states that employer must give employees the opportunity to submit evidence of the vaccine and obtain the discount at least once a year. This can cause complications with the plan’s administration, as premium deductions may vary once the vaccine is obtained. Employers should consult with their service providers to determine how frequently an adjustment to premiums can be made.

    1. An employer cannot permit total rewards under all wellness programs to exceed 30% of the total cost of coverage (including both employer and employee contributions).

It is important for an employer to review existing programs prior to implementing a vaccine incentive. Wellness programs are frequently designed to allow for the highest permissible reward, to maximize participation. If an employer currently has such a program, the aggregate proposed reward may be too high to be permissible.

    1. The program must be designed in a way that has a “reasonable chance of improving the health of, or preventing disease in, participating individuals…”

This factor appears to be easily met in a vaccine incentive program. Note, however, that the program also must not be overly burdensome on employees.

    1. All similarly situated individuals must have the opportunity to receive the reward. This means that individuals who are unable to meet the requirements of the wellness plan, or for whom it is medically inadvisable, must be given a reasonable alternative standard. Plan materials are required to provide notice of the availability of an alternative means of obtaining the reward.

This appears to be the most difficult standard to meet. There is some question as to what type of verification an employer can request to determine medical inadvisability, and alternative standards are similarly difficult to determine. It is possible that an employer could require additional mitigation measures (masking, social distancing, or telework) for individuals who are unable to get the vaccine, but enforcement will be practically difficult.

Note that there are ADA considerations that run essentially parallel with the wellness program rules discussed above. ADA contains the additional requirement that the program must not be implemented in a “coercive” manner and mandates that records associated with the program must be maintained confidentially.

One additional complication due to the ADA is that the Equal Employment Opportunity Commission (EEOC) has explicitly stated that a vaccination program in which (1) the employer (or its agent) administers the vaccine and (2) benefits are conditioned on an employee’s family members (i.e., dependents) vaccination will violate the Genetic Nondiscrimination Act. Accordingly, this design should be avoided. In practice, it is likely easier to implement a program that allows a third party to administer the vaccine give its general availability.

A nationwide vaccine mandate may eventually render a vaccine-specific wellness program moot. However, until the specifics of the mandate are established, some employers may consider alternative incentives.

Sarah K. Ivy, Esq. is the Chair of Saxton & Stump’s Employee Benefits and Executive Compensation team and focuses her practice in the areas of employee benefits law, executive compensation and taxation. She advises clients across all industries including both for-profit and non-profit organizations. Based in Lancaster, PA, she can be reached at

Reprinted with permission from the November 5, 2021 edition of the “Legal Intelligencer”© 2021 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or