Short answer: yes. Employees are allowed to decline group health insurance coverage. The Affordable Care Act (ACA) used to require everyone to sign up for a health plan, get an exemption, or pay a fine to the IRS—but that federal fee became irrelevant in 2019.
Today, nearly 40% of all small businesses offer health insurance to their teams—and that number climbs to more than two-thirds among employers with 10+ employees. When you offer health insurance coverage for long enough, chances are you'll eventually run into an employee who wants to waive coverage. It might be because their spouse's plan already covers them, they're weighing a marketplace option, or the cost just doesn't work for them right now.
It's a normal, common decision, but there's a right way to handle it so your plan and your ACA compliance stay intact.
In this guide, we'll walk you through exactly how to let an employee decline coverage the right way: what to document, what to tell them, and what it means for your plan.
Why people decline employer-sponsored health insurance
There are a few reasons your employees may reject the health coverage you’re offering:
They’re already under a family member’s plan.
They're on Medicare or Medicaid.
They don't want to pay the premium.
They’re receiving insurance from another employer.
They prefer an individual health plan or a health insurance marketplace plan because it offers better benefits or is more affordable.
How employees waive health coverage
An existing employee can only decline an employer-sponsored health plan during an open enrollment period. Otherwise, they’ll have to wait for the next enrollment period to come around, unless they have a qualifying life event, like a birth or marriage. A new hire may decline during their initial enrollment period when they first become eligible for your benefits.
If employees who declined ever lose their other source of coverage, they qualify for a special enrollment period and can join your plan within 30 days of losing coverage, with their new coverage starting the first of the following month. Keep in mind that this only applies if their coverage has expired or otherwise ended—not because they stopped payment or decided they don’t want it anymore.
One exception: if the coverage they lost was Medicaid or CHIP (or they newly become eligible for state premium assistance under one of those programs), they get a longer window—60 days instead of 30—to request enrollment in your plan.
What should I do if my employee wants to waive health coverage?
If your employee wants to decline your employer-sponsored health insurance plan, you’ll need to make sure you have taken all the steps to stay compliant.
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1. Provide the opportunity to enroll
Your first responsibility is to make sure all full-time employees have had the chance to sign up for adequate health insurance during open enrollment. To be adequate, your plan needs to meet the ACA’s coverage requirements:
Minimum essential coverage (MEC). Your plan needs to qualify as the type of coverage the ACA recognizes, which can be as simple as offering a group health plan.
Minimum value. Your plan needs to cover at least 60% of the total cost of care, on average, so employees aren't left paying the majority of their own medical costs.
Affordability. What you charge employees for their own coverage can't exceed a set percentage of their income (adjusted annually by the IRS).
If someone wasn't given the opportunity to enroll, or your plan didn't meet all three standards above, they can sign up for a plan from HealthCare.gov and then claim a premium tax credit or premium subsidy on their taxes.
When an employee submits these claims, it can trigger an audit. It tells the IRS that you didn't offer your employees adequate health insurance, even though you were supposed to. If you fail the audit and you're a company with 50 or more full-time employees (FTEs)—known as an Applicable Large Employer, or ALE—you may need to pay a penalty.
2. Educate employees on their options
Before an employee decides to decline your health insurance plan, make sure you’ve properly educated the team on what their choices are.
If an employee is interested in waiving, give them a copy of the summary of benefits and coverage. This enables them to compare it with other options they’re interested in or already have in place through a partner, a parent if they’re under 26, individual plans, a marketplace plan, or another source.
You should also let employees know that:
If the option you’re providing meets the ACA standards and they waive, they no longer qualify for any premium marketplace subsidies. It may look like they qualify at first, but the IRS will see that you offered a plan and will take back any credit they received.
Opting out of insurance at work means their family won’t be eligible for that plan either.
3. Document their decision with a waiver of coverage
Once an employee has officially decided to decline coverage, you will need them to fill out a waiver of coverage form, which you can get from your carrier. They’ll have to fill out the following details:
Name
Social Security number
Policy number and carrier information for their main plan
Waiver of coverage explanation
The waiver of coverage explanation typically contains language that says they understand that if they reject coverage, they won’t be able to join the plan until the next open enrollment period, or if they experience a qualifying life event. It also lays out what those special enrollment periods entail.
Can an employee still decline coverage if it affects my plan's participation rate?
Yes, an employee may decline coverage even if it affects your plan’s participation rate. One key exception where they may not be allowed to decline is when employer contributions cover 100% of the health insurance premiums and the employee lives in a state that says in this case, they can’t decline. For example, in New York, the law itself doesn't allow a waiver when the employer pays the full premium.
Don't worry: if an employee has a valid reason for declining coverage (for example, they have existing coverage with their spouse's employer) the carrier won't apply that person toward your minimum. However, if they don't have a valid reason, it will affect the participation calculation for your plan.
If you manage benefits through Gusto, waiver reasons are captured automatically as employees enroll or decline, so there's no manual tracking to make sure your participation numbers stay accurate for your carrier.
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FAQs
Am I liable if an employee's coverage doesn't meet ACA standards?
You're only liable if your own offer of coverage falls short—i.e. is not affordable, doesn't meet minimum value, or isn't extended to enough employees—and an employee then qualifies for a premium subsidy as a result. If an employee independently buys a plan that doesn't meet the minimum value standard on their own, that’s their choice. You have to comply with the ACA, but if one of your employees doesn't, you're not at fault in the eyes of the IRS.
Do states have rules about employees declining health coverage?
Yes. Some states go beyond the federal individual mandate (which currently carries no penalty) and add their own rules around declining employer coverage. New York, for example, has an insurance law that blocks employees from waiving coverage entirely if the employer pays 100% of the premium. Check your state's specific rules before finalizing a waiver policy.
Can I require my employees to enroll in health insurance?
No, not usually. Enrollment in a group health plan is voluntary, and employers generally can't make it a condition of employment. Exceptions exist for employees covered by a collective bargaining agreement that mandates enrollment, or certain visa holders—like J-1 exchange visitors—required to maintain qualifying coverage as a condition of their visa status.
Is there a penalty for employees who decline health insurance?
Not at the federal level. The ACA's individual mandate penalty was reduced to $0 starting in 2019. A handful of states (California, Massachusetts, New Jersey, Rhode Island, and Washington, D.C.) still enforce their own individual mandate penalties for residents who go without coverage, regardless of what their employer offers.
How do I report that an employee waived coverage to the IRS?
Leave line 16 blank on the employee's 1095-C form, or enter the applicable affordability safe harbor code (2F, 2G, or 2H) if one applies, to indicate the employee waived your health coverage. The right code depends on which safe harbor, if any, your offer relied on. If Gusto is your broker, we handle this coding and filing for you.
