New Rules Proposed on TRICARE Incentives

May 13, 2008

The Department of Defense (DoD) recently issued proposed regulations on the prohibition against employers offering financial or other benefits to TRICARE beneficiaries as incentives not to enroll (or to terminate enrollment) in group health plans.

As a review, TRICARE coverage is offered to those on active military duty. It is typically a secondary payer of medical coverage, with the employer-sponsored group health plan providing primary coverage.

These regulations specifically state that employers may not offer TRICARE beneficiaries an alternative to the employer's primary plan unless the alternative meets two requirements. First, the beneficiary must have primary coverage other than TRICARE. Second, the alternative benefit is through a Section 125 cafeteria plan that is offered to all employees, including employees who are not TRICARE eligible employees. The TRICARE incentive prohibition "applies in the same manner" as the prohibition against offering incentives under the Medicare Secondary Payer (MSP) rules.

Therefore, typical cafeteria plan cash-out provisions – where non-participating employees receive an after-tax payment each month – are permissible as long as they are offered to all eligible employees. Supplemental insurance offered under a cafeteria plan would not be improper, so long as it is not a "TRICARE-exclusive plan." However, TRICARE-exclusive supplemental insurance plans may not be offered. An employer is not allowed to reimburse employees for TRICARE premiums through the cafeteria plan (i.e., on a pre-tax basis).

The federal government has a strong interest in prohibiting incentives. As stated in the regulations, “[t]hese actions shift thousands of dollars of annual health costs per employee to the Defense Department, draining resources from higher national security priorities.”

These regulations are a result of the John Warner National Defense Authorization Act of 2007. The law’s provisions went into effect for plan years starting on or after January 1, 2008, and are effective for employers of 20 or more employees. Civil penalties up to $5,000 can be imposed for each violation. A comment period on the regulations ends on May 27, 2008.