Risks of ‘Opting-Out’ of Company Health Plans

You and your spouse work. You both have company health insurance that covers each other. Wouldn’t it be great if you could save money by opting out of your health coverage, because you are covered by your spouse’s plan anyway?

Fortunately, such “opt-out” options are becoming increasingly available at larger companies. But be careful, because making an ill-advised decision could leave you vulnerable to a big financial liability or other consequences.

Opt-out options are available at firms offering so-called flexible benefit plans. Such plans allow you to tailor health insurance, dental and vision plans, life and disability insurance, vacation days and other benefits to suit your needs.

Under a typical flex plan, you can purchase benefits--say, extra vacation days or cash bonuses--with credits you save by opting out of other benefits, such as dental coverage.

But for a long time, most companies refused to allow workers to opt out of medical and certain other coverage completely. That was largely out of a paternalistic concern that employees might make bad choices that could leave them financially vulnerable in a medical catastrophe.

But that’s changing. Reflecting reduced employer paternalism, 70% of 212 large companies recently surveyed with flex plans allow participants to opt out of medical coverage, according to TPF&C;, an employee benefits consulting firm. Only about 25% of large companies surveyed in 1985 offered such an option.

Other benefits that workers can decline include dental coverage (opting out allowed at 80% of companies surveyed), long-term disability insurance (32%) and group life insurance (16%).

The key factors behind this trend are rising health plan costs and changing demographics.

“As the work force has changed, more and more households have two working spouses,” both with medical plans covering the other spouse, says James K. Foreman, a principal and flexible benefits expert at TPF&C;’s Los Angeles office. “So rather than forcing employees to take medical plans, (more employers) want to allow employees to make their own choices.”

But before you choose an opt-out option, consider these factors:

* Opting out is not automatic. Before you can drop a medical plan, you may be required to prove that you have alternative coverage. You may need to furnish the name of the employer providing the other coverage, a policy number or signed documentation. Some firms require documentation to be renewed each year.

* You may have to live with negative consequences of your decision. If you drop out of medical coverage, and then incur a catastrophic injury that your spouse’s plan won’t cover, some companies might say, “Tough luck.”

* No two companies’ medical plans are alike. Some require higher deductibles. Others require membership in a health maintenance organization. Some carry clauses that bar immediate coverage of “pre-existing conditions.” Others institute waiting periods before you can get coverage. So deciding which spouse’s plan to retain will require careful analysis.

* Getting back into a plan may be complicated. Companies and their insurers want to protect themselves from workers seeking to re-enroll in a plan just because they want coverage for an ailment they just incurred. Accordingly, Foreman says, some employers won’t allow you back into a basic medical plan until the next open enrollment period--which could be as long as a year later--unless there’s a change in your family status, such as your spouse losing his or her job.

With life and disability insurance, you may not be allowed back in unless you can prove that you are in good health, Foreman says. With dental and vision plans, you may not be allowed back for at least 12 to 24 months, regardless of whether you’re in good health, he says. So if you opt out of dental coverage and then discover you need costly root canal work right away, you may have to pay for it.

* You could incur a tax liability. Any cash you take in exchange for opting out of certain benefits will be considered taxable income. The only way you can defer that liability, Foreman says, is to have your employer put the money directly into your 401(k) company savings plan. In that case, because you never touch the money, it’s not immediately taxable.