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COVID-19 Vaccination Incentives and Surcharges OK’d in Group Health Plan Guidance

October 5, 2021

On Oct. 4, 2021, the U.S. Departments of Labor, Health and Human Services, and Treasury (collectively, the departments) released guidance (FAQs) concerning application of the HIPAA nondiscrimination and Affordable Care Act (ACA) affordability rules to plan sponsors considering whether to provide group health plan premium discounts for employees who obtain the COVID-19 vaccine or levy surcharges on participants in group health plans who remain unvaccinated.

In short, the FAQs confirm that (1) COVID-19 vaccination discounts/surcharges are governed by activity-based, health-contingent wellness plan rules (as an exception to HIPAA’s general nondiscrimination requirement and compliant with wellness plan regulations implemented following the ACA), thereby limiting the discount/surcharge to 30 percent of the employee-only coverage amount; and (2) any discount is disregarded in assessing ACA affordability and any surcharge is included in the relevant premium amount when determining ACA affordability.


Prior to the Biden administration’s rollout of certain vaccine mandates, many employers and plan sponsors were considering how to motivate unvaccinated employees to become vaccinated as they designed the imminent implementation of “return to work” policies. To encourage employees to become vaccinated, employers considered whether they could offer incentives, including providing incentives or imposing surcharges under their group health plans. Despite the recent vaccine mandate guidance, many employers are still considering vaccine incentives and/or surcharges as a means to further increase vaccination rates among employees.

FAQs Provide Clarity on Vaccine Incentives/Surcharges

In response to a multitude of plan sponsor questions regarding how to navigate the wellness plan rules in connection with vaccine incentives and surcharges, the departments released helpful FAQs for employers wishing to pursue these strategies.

The FAQs clarify the following:

Vaccine Incentives/Surcharges That Involve the Employer’s Group Health Plan Are Health-Contingent, Activity-Based Wellness Programs.

COVID-19 vaccination incentives/surcharges are considered health-contingent, activity-based wellness programs under the wellness plan rules. As such, the following rules apply:

  • 30 Percent Cap. The total amount of non-tobacco-related incentives/surcharges cannot exceed 30 percent of the cost of employee-only coverage if the program is offered only to employees.
    • If the incentive is offered to dependents, the 30 percent cap is applied to the cost of coverage for the employee and dependents enrolled.

McGuireWoods Insight — Many employers already have existing wellness programs and may not have much “room” to layer on additional incentives/surcharges and remain under the 30 percent cap. This is especially true for employer plan sponsors that adopted smoking cessation wellness programs that use a 50 percent cap permissible specifically for those programs under the wellness plan rules.

  • Annual Qualifying Period. Participants must be given the opportunity to qualify for the incentive/avoid the surcharge at least once every year.

McGuireWoods Insight — Most employers are considering multiple entry points each plan year for participants who become vaccinated or even “rolling” qualification for the incentive/removal of the surcharge. Some employers are also considering aligning new qualifying periods as the Centers for Disease Control and Prevention (CDC) releases additional guidance, for example, in the case of booster shots.

  • Promote Health/Prevent Disease. The program must be designed to reasonably promote participant health or prevent disease.

McGuireWoods Insight — This standard should be relatively easy to establish as COVID-19 vaccinations have been widely demonstrated to prevent disease associated with the virus.

  • Available to All. In general, the vaccine program must be available to all similarly situated health plan participants.

McGuireWoods Insight — Employers should be cautious about offering incentives to/imposing surcharges on only select groups of employees. For example, targeting a specific group, such as warehouse employees, would be problematic.

  • Disclosure and Reasonable Alternative Standard. Plan materials must describe the vaccination incentive program and availability of a reasonable alternative standard to qualify for the incentive/avoid the surcharge. The disclosure must provide contact information for obtaining the reasonable alternative standard and a statement that recommendations of an individual’s personal physician will be accommodated.

Reasonable Alternative Standard — Narrow Scope

Plan sponsors must provide a reasonable alternative standard to participants for whom it is unreasonably difficult due to a medical condition or for whom it is medically inadvisable to become vaccinated. The example in the FAQs specifically notes an attestation to comply with the CDC’s masking requirement as a reasonable alternative standard to qualify for a vaccine wellness program incentive.

  • Because the guidance indicates that vaccine incentive programs are health-contingent, activity-based wellness programs, plan sponsors may require a doctor’s note confirming a participant cannot or should not become vaccinated.

McGuireWoods Insight — This exception is far narrower than health-contingent, outcome-based wellness programs that require reasonable alternative standards be provided to anyone who does not satisfy the applicable requirement and that prohibit requiring a doctor’s note from a participant. There are certainly individuals for whom it is not advisable to become vaccinated, but the U.S. medical community is uniform in its support for vaccination. Given the relatively small number of individuals for whom vaccination is not medically advisable, expect plan sponsors to simply waive the vaccination requirement.

ACA Affordability Rules Apply

The FAQs also confirm that vaccination incentives should be disregarded when determining compliance with the ACA’s affordability rules and vaccination surcharges should be included in the premium cost when performing affordability calculations.

  • The ACA’s affordability requirements are satisfied if the lowest-cost, self-only coverage option an employer offers does not exceed the specified percentage of an employee’s household income (currently, 9.83 percent). The affordability threshold is the highest percentage of household income an employee can be required to pay for monthly health plan premiums, based on the least-expensive employer-sponsored plan meeting the ACA’s minimum essential coverage requirements.
  • The ACA provides three safe harbors for satisfying the ACA affordability requirements with respect to determining employee’s household incomes: (1) W-2 wages, (2) rate of pay (hourly wage x 130 hours per month/9.83 percent of monthly salary as of the first day of the coverage period), or (3) individual federal poverty level.

McGuireWoods Insight — Employers considering utilizing the incentive approach should have no ACA affordability concerns, as their plans presumably already satisfied the requirements. Conversely, employers wishing to impose a surcharge should rerun ACA affordability calculations to ensure compliance.

Other Vaccination Incentive Programs

The FAQs address wellness program incentives that impact the cost of coverage under group health plans and specifically do not address incentives offered by employers as part of return-to-work programs or workplace policies unrelated to a health plan. The guidance suggests that employers wishing to adopt incentive programs that do not involve health plans review the Equal Employment Opportunity Commission’s COVID-19 guidance.

Cannot Condition Eligibility/Coverage on Vaccination Status

The FAQs make it clear that plan sponsors cannot condition eligibility for benefits on a participant’s vaccination status. Thus, unvaccinated health plan participants cannot be denied benefits or eligibility for coverage.

Additional Considerations

Plan sponsors should remember that any midyear material modifications to their group health plans must be communicated at least 60 days in advance. Given that open enrollment is likely underway or about to commence for many employers, it may not be administratively possible to implement a vaccine incentive/surcharge program for Jan. 1, 2022. If so, the midyear notification rules should be considered when rolling out vaccine incentives/surcharges.

For further information, please contact one of the authors or any other member of McGuireWoods’ employee benefits team.