New York State Seal

STATE OF NEW YORK

INSURANCE DEPARTMENT

25 BEAVER STREET

NEW YORK, NEW YORK 10004

David A. Paterson

Governor

James J. Wrynn

Superintendent

OGC Op. No. 10-12-15

The Office of General Counsel issued the following opinion December 31, 2010 on representing the position of the New York State Insurance Department.

Re: Employer Sponsored Group Health Insurance, Waiver of Coverage

Question Presented:

May an employee opt out of his or her employer-sponsored group health insurance coverage, where the coverage is paid for by the employer with no contribution by the employee?

Conclusion:

No. In accordance with N.Y. Ins. Law § 4235(c)(1)(A) (McKinney Supp. 2010), if an employee opted out of his or her employer-sponsored coverage, where the coverage is paid for by the employer without contribution by the employee, the group would no longer be a valid group under the section.

Facts:

The inquirer is an industry resource representative at the ABC Company (“ABC”), and that a member of ABC has received an inquiry from an employer-client as to whether the employees of the client may opt out of the group health insurance coverage provided by the employer, and rely upon coverage provided to the employee as a dependent of the employee’s spouse. The employer pays the entire cost of coverage for the employees, and a portion of the cost of coverage for the employee’s dependents. 1 Accordingly, the member has inquired whether an employee may opt out of his or her employer sponsored group health insurance coverage where the coverage is provided by the employer at no cost to the employee.

Analysis:

The provision of health insurance by an employer constitutes a welfare benefit plan as that term is defined under the Employee Retirement Income Security Act (“ERISA”). 29 U.S.C.A. § 1002(1) (West 1999). While ERISA generally preempts state laws, insurance laws are excepted from the preemption. See 29 U.S.C.A. § 1144. This provision has been construed to allow state insurance laws to apply to insured plans, notwithstanding that such laws may affect an ERISA welfare benefit plan. See Metropolitan Life v. Massachusetts (“Metropolitan Life”), 471 U.S. 724 (1985).

Insurance Law § 4235(c)(1)(A), which is relevant to the inquiry, authorizes the issuance of group accident and health insurance through:

A policy issued to an employer . . . which employer . . . shall be deemed the policyholder, insuring with or without evidence of insurability satisfactory to the insurer, employees of such employer, and insuring, except as hereinafter provided, all of such employees or all of any class or classes thereof determined by conditions pertaining to the employment or a combination of such conditions and conditions pertaining to the family status of the employee, for insurance coverage on each person insured based upon some plan which will preclude individual selection. . . . The premium for the policy shall be paid by the policyholder, either from the employer's funds, or from funds contributed by the insured employees, or from funds contributed jointly by the employer and employees. If all or part of the premium is to be derived from funds contributed by the insured employees, then such policy must insure not less than fifty percent of such eligible employees or, if less, fifty or more of such employees. (Emphasis added.)

The statute by its express terms explicitly provides that the policy issued to an employer insuring its employees, “except as hereinafter provided”, shall insure “all of such employees” and thus requires that all employees (or a specified class or classes thereof) provided coverage by his or her employer must accept the coverage. The only exception is where the employer requires a contribution by the employee. See Opinion of the Office of General Counsel dated May 7, 2004. The statute therefore prohibits an employee from declining non-contributory accident and health insurance coverage provided by the employer.

The statute serves several policy interests. First, the statute protects an individual from an insurer refusing to cover the person as a dependent on the grounds that the individual had an opportunity for “free” coverage from his or her employer, but declined such coverage. Another reason is to protect insurers from individuals seeking to manipulate the coordination of benefit rules 2 by waiving coverage in order to have a spouse’s coverage with richer benefits be primary.

A third reason is that, while Insurance Law §§ 3231(a) and 4317(a) do not allow underwriting or experience rating of small groups, e.g. those consisting of under 50 employees, some employers that qualify as a “large” group may wish to encourage employees with bad health to opt out of the coverage. 3 The law prevents an employer from utilizing cash or other payment to the employee, which would be less than the cost to the employer of covering that individual, as an incentive to opt out of non-contributory coverage.

Thus, pursuant to Insurance Law § 4235(c)(1)(A), an employee may not opt out of his or her employer-sponsored group health insurance coverage where the coverage is paid for by the employer with no contribution by the employee. The insurer should be informed that its instruction that a waiver is permissible is in error.

For further information, you may contact Principal Attorney Alan Rachlin at the New York City Office.

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1 The rules for employer contribution will be affected by the Patient Protection and Affordable Care Act, Pub. L. 111-148 (2010), which takes effect on various dates from now to 2014, and will require changes to the Insurance Law. This opinion is based solely on the New York Insurance Law as it presently stands.

2 See 11 NYCRR § 52.23 (Regulation 62).

3 While ERISA prohibits a state from mandating plan coverage by an employer, this incidental effect on a plan is saved from preemption under the holding in Metropolitan Life.