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Covid Vaccine Premium Incentives and Surcharges

Question: What are the top five compliance issues for employers considering a Covid vaccine premium incentive or surcharge for the health plan?

Short Answer: The EEOC recently issued guidance confirming that most vaccine premium incentives (premium reduction for being vaccinated) and surcharges (premium increase for being unvaccinated) will not present any issues under the ADA or GINA.  However, employers considering a vaccine incentive/surcharge still need to take into account the HIPAA/ACA wellness program rights and limitations, ACA employer mandate affordability standards, and Title VII religious accommodations.

Executive Summary

There are five main compliance issues for employers to address when considering a COVID-19 (“Covid”) premium incentive or surcharge for the health plan:

  • No Employer Role in Vaccine Administration: Employers should not administer the vaccine by directly providing it to employees either through its own workforce or agents (e.g., third-party vendors) acting on the employer’s behalf. Employees should receive the Covid vaccine from a pharmacy, public health department, or any other health care provider in the community not tied to the employer to avoid strict limitations on the incentive or surcharge under the ADA and GINA.
  • HIPAA/ACA Wellness Program Rules Apply: These rules limit the Covid vaccine incentive or surcharge to 30% of the total cost of the coverage. They also require the employer to offer reasonable alternative standards for employees to receive the incentive or avoid the surcharge for any individual for whom it is a) unreasonably difficult to receive the vaccine due to a medical condition, or b) medically inadvisable to receive the vaccine.
  • Incentive/Surcharge Affects ACA Affordability: The employer’s lowest-cost plan option cost is determined without regard to any discount the employee may have received for being vaccinated, and including the amount of the surcharge the employee may have avoided by being vaccinated. This can cause employers to inadvertently move out of the automatic passing grade offered through the federal poverty line affordability safe harbor (and the associated streamlined reporting through the qualifying offer method).  It may also cause the offer of coverage to fail to meet the rate of pay safe affordability safe harbor, potentially triggering unexpected “B Penalty” liability.
  • Religious Accommodations: Where employees express that a sincerely held religious belief, practice, or observance prevents them from getting a Covid vaccine, Title VII of the Civil Rights Act requires the employer to provide a reasonable accommodation unless it would pose an undue hardship. Employee notifications of a religious objection may require consultation with employment counsel to determine the appropriate accommodation.
  • President Biden’s OSHA Directive: Although we expect OSHA to issue an Emergency Temporary Standard (ETS) in the coming weeks that will require Covid vaccination or weekly testing for employees of large (100+ employee) employers, the vaccine incentive/surcharge is not likely to become irrelevant. The ETS will last only six months, will likely affect only employees (not family members), and there will be numerous legal challenges that could limit the ETS’s effectiveness in increasing employee vaccination rates.

Big Picture: The Delta Precedent 

In a recent post, Delta Air Lines CEO Ed Bastian shared the company’s plans to begin imposing a Covid vaccine premium surcharge of 00 per month for unvaccinated employees.  In other words, the employee-share of the premium will increase by 00/month for employees who choose not to be vaccinated.  Mr. Bastian cited the high cost of an average Covid-related hospital stay (0,000 per person) and the rise of the (not eponymously named) Delta variant as reasons why the surcharge was “necessary to address the financial risk the decision not to vaccinate is creating for our company.”

Since that announcement, many employers have begun to at least consider whether a Covid vaccine incentive surcharge or incentive might be on the table for their health plan.  The purpose of this post is to address how the rules governing employer wellness programs cover the vaccine incentive/surcharge, and how employers considering the approach should structure the incentive/surcharge to comply with applicable law.

Important Note: Needless to say, there are significant potential employee relations issues associated with this topic.  In addition to the compliance overview addressed here, employers will need to carefully consider whether the potential health plan cost savings served by a Covid vaccine surcharge or incentive are worth the potential headaches it could cause by exacerbating multiple pandemic and vaccine-related tensions in the workforce.

Issue #1: The ADA—Vaccine Incentives and Surcharges Generally Permitted

To say that the state of the EEOC’s regulatory and enforcement posture toward wellness programs is currently in flux would be a major understatement.  After countless years of waiting for the EEOC’s authoritative position on wellness program standards under the ADA’s “voluntary” standard for any disability-related inquiry or medical examination of employees, the EEOC issued final regulations in 2016 defining the “voluntary standard” for wellness programs.  These ADA rules that originally took effect in 2017 didn’t perfectly reconcile with the existing HIPAA/ACA wellness program standard, but they were closely related enough that employers finally could form a complete roadmap for program design to satisfy the multiplicity of regulatory agencies with oversight.

The waters did not stay calm for long.  Shortly thereafter a federal court ruled that the EEOC wellness program rules do not meet the requirements of the ADA, and the EEOC subsequently had to formally remove those regulations as of 2019.

Further complicating matters, the EEOC issued new proposed ADA wellness regulations in January 2021 at the very end of the Trump administration that would have made significant changes to the original vacated regulations.  However, the Biden administration removed those proposed regulations shortly thereafter pursuant to a regulatory freeze memo issued on his date of inauguration.

This epic (but still unfinished) wellness program saga leaves the current state of play with some good and bad news.

The bad news: For most wellness program matters, employers still have very little guidance available of how to structure the arrangement to satisfy the ADA wellness program requirements.  A “good faith” approach is probably to satisfy the previously finalized rules—even though they have been ruled to violate the ADA and vacated—given that the subsequently proposed Trump-era replacement rules appear not to hold any favor with the current Biden administration and EEOC.  The industry will continue to struggle with best practices in this area until we have new EEOC regulations.

The good news: Employers do have clear direction from the EEOC when it comes to the vaccine incentive and surcharge components of a wellness program.  The EEOC recently updated its “What You Should Know About COVID-19 and the ADA, the Rehabilitation Act, and Other EEO Laws” with a new section titled “Employer Incentives for Covid-19 Voluntary Vaccinations Under ADA and GINA.”

The guidance divides ADA vaccine incentive/surcharge compliance into two broad categories:

  • Vaccines Not Administered by the Employer: No ADA Limitations

 The ADA permits employers to impose Covid vaccine incentives/surcharges on employees where the vaccine was provided by a pharmacy, public health department, or any other health care provider in the community.  In other words, the employer did not provide the vaccine either through its own workforce or through its agent.

In this case, the ADA “voluntary” standard wellness program limitations do not apply because requesting documentation or other confirmation showing that an employee received the vaccine from the community at large (i.e., not the employer or its agent) is not a disability related inquiry covered by the ADA.  Accordingly, the ADA does not impose any restrictions on a Covid vaccine premium incentive/surcharge as long as the employer is not involved in providing the vaccine.

The only ADA rules that apply in this context is the ADA confidentiality standard with respect to the employee’s vaccination status.

  • Vaccines Administered by the Employer: Strict ADA Limitations

On the other hand, strict limitations apply to Covid premium incentives/surcharges where the employer or its agent administers the vaccine.  This standard applies only where the employer facilitates the vaccination by directly providing it to employees either through its own workforce or agents (e.g., third-party vendors) acting on the employer’s behalf.

In this case, the EEOC provides that any incentive or surcharge cannot be “so substantial as to be coercive.”  In other words, it must be “voluntary” for the employee to engage in the vaccination under the ADA meaning of that term.

The guidance does not provide any further clarification on the exact contours of what level of an incentive/reward might qualify as “so substantial as to be coercive.”  However, it does state that a “very large” incentive/surcharge could make employees feel pressured to disclose protected medical information to the employer because the employee would have to answer pre-vaccination disability-related screening questions.

Given the lack of any bright-line determination as to what might be “so substantial as to be coercive” (or, more simply put “very large”), employers interested in a Covid vaccine premium/surcharge approach should generally avoid administering the vaccine directly (including through an agent) to employees.

Issue #2 GINA—Vaccine Incentives and Surcharges Generally Permitted

The wellness program restrictions under GINA are largely tied at the hip with the ADA wellness program restrictions described above.  However, as with the ADA, the silver lining again is the EEOC also provided updated guidance with clarity on the application of GINA when it comes to the vaccine incentive and surcharge components of a wellness program.

Similar to the ADA rules, GINA generally will not impose any limitations on a Covid vaccine incentive/surcharge where the vaccine was provided by a pharmacy, public health department, or any other health care provider in the community.  In that case, GINA does not apply to the employer’s request that the employee show documentation confirming the employee or a family member received the vaccine.  The guidance confirms that the fact someone received a vaccination is not family medical history or any other form of genetic information subject to GINA.

On the other had, GINA does prohibit employers from offering any incentives to an employee in exchange for demonstrating that a family member received the vaccine from the employer or its agent.  This prohibition applies only where the employer facilitates the vaccination by directly providing it to employees either through its own workforce or agents (e.g., third-party vendors) acting on the employer’s behalf.

Where the employer (or its agent) is providing the vaccine to a family, the employer would receive responses to pre-vaccine medical screening questions.  That information would be considered family medical history of the employee (i.e., genetic information), and GINA prohibits employers from providing incentives for the employee’s genetic information.  The employer therefore cannot offer a Covid premium incentive for an employee’s family member where the vaccine is administered by the employer (or its agent).

Issue #3: Title VII of the Civil Rights Act—Reasonable Accommodation for Sincerely Held Religious Belief

Recently updated EEOC guidance confirms that once an employer is on notice that an employee’s sincerely held religious belief, practice, or observance prevents the employee from getting a Covid vaccine, the employer must provide a reasonable accommodation unless it would pose an undue hardship.

Employers considering a Covid vaccine premium incentive/surcharge should consult with employment law counsel experienced in Title VII reasonable accommodation practice to ensure they provide sufficient accommodations to satisfy this standard for employees with religious objections to the vaccine.

Issue #4: HIPAA/ACA—Activity-Only Health-Contingent Wellness Program Rules Apply

Fortunately, the HIPAA/ACA side of the wellness program rules (as opposed to the ADA side described above) have remained relatively stable over the years and present a mostly clear roadmap for employer compliance.  The HIPAA wellness program regulations issued in 2006 were largely kept intact when the ACA codified the rules with only minor changes (e.g., increasing the incentive limit from 20% to 30%, and 50% for tobacco cessation) in 2010.  The DOL/IRS/HHS issued new wellness program regulations in 2013 that again mostly preserved the same structure that had already been established.

The HIPAA/ACA wellness program rules apply where the arrangement involves a group health plan, which generally is defined as a program that provides §213(d) medical care.  This includes a Covid vaccine premium incentive or surcharge.

The rules then distinguish between two major types of wellness programs: 1) Participatory Programs, and 2) Health-Contingent Programs.  A Covid vaccine premium incentive or surcharge is a health-contingent wellness program because it requires the employee to satisfy a standard related to a health factor to receive the premium decrease or avoid the premium increase.

The rules then further distinguish between two sub-types of health-contingent programs: 1) Activity-Only Programs, and 2) Outcome-Based Programs.  A Covid vaccine premium incentive or surcharge is likely an activity-only program because it requires the employee to perform or complete an activity related to a health factor (i.e., get vaccinated) to receive the premium decrease or avoid the premium increase.  Other examples of activity-only programs include walking, diet, or exercise programs.

Some commentary has suggested that the Tri-Agencies (DOL/IRS/HHS) may view a Covid vaccine premium incentive or surcharge as an outcome-based program.  Outcome-based programs require the employee to attain or maintain a specific health outcome to obtain a reward.  Examples include smoking cessation, attaining certain biometric screening results, and requiring additional steps for individuals identified outside a health range.  These arguments suggest that a Covid vaccine incentive/surcharge is analogous to similar arrangements for tobacco cessation.

Our position is that a Covid vaccine premium incentive or surcharge involves simply the activity of taking the shot(s), with no related requirement to attain or maintain a specific health outcome (unlike a premium incentive/surcharge for non-tobacco users).  In other words, being vaccinated is not similar to attaining or maintaining a certain BMI or tobacco cessation, both of which require a continuing obligation for the individual.  The status of being vaccinated requires no additional steps or ongoing requirements after the individual completes the activity of receiving the shot(s).

Accordingly, the HIPAA/ACA wellness program rules set forth the following five requirements for Covid vaccine premium incentives or surcharges as an activity-only wellness program:

  • Frequency of Opportunity to Qualify

The program must give individuals eligible for the Covid vaccine premium incentive or surcharge the opportunity to qualify for the premium discount or avoid the premium increase at least once per year.

FAQ guidance provides that the program needs only to offer the reasonable opportunity to enroll and qualify for the reward (or avoid the surcharge) by verifying vaccinated status only at the beginning of the year.  There is no requirement to offer the incentive or ability to avoid the surcharge for mid-year enrollments.

  • Size of Reward

 The Covid vaccine premium incentive or surcharge cannot exceed 30% of the total cost of self-only coverage if the incentive/surcharge is limited to the employee.  If the Covid vaccine incentive/surcharge includes family members, the amount cannot exceed 30% of the total cost of the coverage in which the employee and any dependents are enrolled.  The total cost of coverage includes both the employee and employer-share of the premium.

For example, assume the monthly premium for employee-only coverage is $500 (of which the employer-share is $375 and the employee-share is $125), and the employer offers/imposes a Covid vaccine incentive/surcharge only for employees.  The maximum amount of the incentive/surcharge would be $150/month, or $1,800/year.

  • Reasonable Design

The wellness program must be reasonably designed to promote health or prevent disease.  This requires that the program have a reasonable chance of improving the health of, or preventing disease in, participating employees, not be overly burdensome, not be a subterfuge for discrimination based on a health factor, and not be highly suspect in the method chosen to promote health or prevent disease.

Covid vaccine premium incentives and surcharges should easily meet this standard as reasonably designed to prevent disease.

  • Reasonable Alternative Standards

The Covid vaccine premium incentive or ability to avoid the unvaccinated surcharge must be available to all similarly situated individuals.  This standard requires offering a reasonable alternative standard (or waiver of the vaccine requirement) for any individual for whom it is a) unreasonably difficult to receive the vaccine due to a medical condition, or b) medically inadvisable to receive the vaccine.

If reasonable under the circumstances, the employer may seek verification from the individual’s personal physician to confirm that the reasonable alternative standard applies.  For example, an employer could ask for verification from the employee’s doctor that the vaccine is medically inadvisable for the employee, and therefore that the employee needs to receive a reasonable alternative standard.

Whether the alternative standard is reasonable will depend on all the facts and circumstances, including:

  • If the alternative standard is an educational program, the employer must make the program available or assist in finding the program (and may not require the employee to pay for the cost);
  • The time commitment required must be reasonable (e.g., requiring nightly attendance in a one-hour class is deemed unreasonable);
  • If the employee’s personal physician states that the alternative standard is not medically appropriate for the employee, the employer must provide a different alternative standard that complies with the recommendations of the physician.

Note: If the Covid vaccine premium incentive or surcharge were viewed as an outcome-based program as suggested by some commentary (see above), the employer would be required to offer a reasonable alternative standard to all employees regardless of whether getting the vaccine was unreasonably difficult due to a medical condition or medically inadvisable.  That would radically change the arrangement, and we do not believe that standard applies here.

  • Notice of Availability of Reasonable Alternative Standard

The employer must disclose in all program materials describing the Covid vaccine premium incentive or surcharge the availability of a reasonable alternative standard (or waiver) to qualify for the incentive or avoid the surcharge.

Tri-Agency Model Language:

“Your health plan is committed to helping you achieve your best health. Rewards for participating in a wellness program are available to all employees. If you think you might be unable to meet a standard for a reward under this wellness program, you might qualify for an opportunity to earn the same reward by different means. Contact us at [insert contact information] and we will work with you (and, if you wish, with your doctor) to find a wellness program with the same reward that is right for you in light of your health status.”

Program materials that merely mention the Covid vaccine premium incentive or surcharge without describing its terms do not need this notice.

Issue #5: ACA Employer Mandate—Vaccine Incentive/Surcharge Could Affect Plan Affordability 

The ACA employer mandate rules apply to employers that are “Applicable Large Employers,” or “ALEs.”  In general, an employer is an ALE if it (along with any members in its controlled group) employed an average of at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year.

Among other circumstances, the §4980H(b) penalty—frequently referred to as the “B Penalty or the “Tack Hammer Penalty”—applies where the ALE’s offer of coverage to a full-time employee is not affordable, and the full-time employee declines the offer of coverage and instead enrolls in subsidized coverage on the Exchange.

Therefore, an ALE’s failure to offer coverage that meets the ACA affordability standard for any given full-time employee creates a B Penalty liability of 38.33/month (,060 annualized) for that full-time employee.  This amount will increase slightly for 2022.

For plan years beginning in 2022, employers automatically satisfy the 9.61% affordability threshold under the federal poverty line safe harbor by offering a lowest-cost medical plan option at the employee-only tier that costs employees no more than 03.14 per month.

Wellness programs that change the employee-share of the premium, including a Covid premium incentive or surcharge, will affect the ACA affordability analysis.  Because a Covid premium incentive or surcharge does not relate to tobacco use, the rules force the employer to take the worst-case scenario approach in determining the cost of the plan.

If the employer is offering a Covid vaccine incentive or surcharge, the employer’s lowest-cost plan option cost is determined without regard to any discount the employee may have received for being vaccinated, and including the amount of the surcharge the employee may have avoided by being vaccinated.

For example, assume the monthly employee-share of the premium for the lowest-cost plan at the employee-only tier is $150, and the employer offers a $50/month Covid vaccine incentive.  For employees who are vaccinated, the premium amount is therefore $100/month.  However, the employer would have to treat (and report via Line 15 of the Form 1095-C) the lowest cost plan as $150/month even for the vaccinated employees who received the incentive and therefore had the premium reduced to $100/month.

Alternatively, assume the monthly employee-share of the premium for the lowest-cost plan at the employee-only tier is $100, and the employer offers a $50/month Covid unvaccinated surcharge.  For employees who are vaccinated, the premium amount is therefore $100/month.  However, the employer would have to treat (and report via Line 15 of the Form 1095-C) the lowest cost plan as $150/month even for the vaccinated employees who avoided the surcharge and therefore paid the standard premium of $100/month.

This can make a significant difference. An employer offering coverage at $100/month would meet the federal poverty line affordability safe harbor to enjoy automatic affordability status and the streamlined ACA reporting qualifying offer method.  However, because the vaccine incentive is not related to tobacco use, the incentive is not treated as earned for purposes of the ACA affordability analysis.

In the above example, the employer would generally have to rely on the more complicated rate of pay affordability safe harbor analysis, and the employer would not qualify for the qualifying offer streamlined reporting method.  Furthermore, the increased cost may cause the plan to fail to meet the rate of pay (or generally less desirable Form W-2) affordability safe harbor for certain lower-paid full-time employees, resulting in potential B Penalty liability of more than $4,000 annualized for such employees if they waive the employer offering and instead enroll in subsidized Exchange coverage.

Bonus: The Biden OSHA Directive—Potential Vaccine Mandate for Employers with 100+ Employees

President Biden recently announced a multi-pronged, comprehensive national strategy designed to provide a path out of the pandemic.  The COVID-19 Action Plan includes directive to OSHA to develop an Emergency Temporary Standard (ETS) that requires all employers with 100 or more employees to ensure their workforce is fully vaccinated.  Any workers who remain unvaccinated would have to produce a negative Covid test at least weekly before entering the workplace.  OSHA has indicated the ETS should be issued in the near future.

Employers may wonder if this new version of a vaccine mandate could make a Covid vaccine premium incentive or surcharge mostly moot.  However, there will be several likely limitations with the ETS approach that should still make a health plan incentive or surcharge relevant:

  • The ETS will last only six months. That will cover only a small portion of the 2022 health plan year.  A formal rulemaking through the standard notice and comment process may take longer than that to develop, and therefore there is a good chance the mandate will (at least temporarily) disappear after that six-month period.
  • The ETS likely won’t include family members. Employers seeking to increase vaccination status among employees’ family members likely will not receive a direct boost from the ETS.  Although some family members may also be employed by large employers, many will not be affected by the order.  A Covid vaccine premium incentive or surcharge that extends to family members to reduce dependent coverage costs may be the only direct way for the employer to encourage family member vaccination.
  • There will be legal challenges. The ETS standard requires a showing that “(A) that employees are exposed to grave danger from exposure to substances or agents determined to be toxic or physically harmful or from new hazards, and (B) that such emergency standard is necessary to protect employees from such danger.”  Whether the ETS meets that standard can be challenged directly to the Circuit Court of Appeals (bypassing the initial District Court level).  This will expedite the process of a potential U.S. Supreme Court decision that would address these likely challenges.

About the author

Brian Gilmore

Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law.


The information provided is of a general nature and an educational resource. It is not intended to provide advice or address the situation of any particular individual or entity. Any recipient shall be responsible for the use to which it puts this document. Newfront shall have no liability for the information provided. While care has been taken to produce this document, Newfront does not warrant, represent or guarantee the completeness, accuracy, adequacy, or fitness with respect to the information contained in this document. The information provided does not reflect new circumstances, or additional regulatory and legal changes. The issues addressed may have legal, financial, and health implications, and we recommend you speak to your legal, financial, and health advisors before acting on any of the information provided.

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