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Health Insurance Deductions: What's Legal, What's Not

Before you require employees to have health insurance or deduct premiums from their paychecks, read this.

Q: Can an employer require an employee to sign up for health insurance coverage through the company and further require that the premium for this coverage be deducted from the employee's paycheck?

A: Depending on the particular insurance policy, employers may need a certain number of employees to sign up for health insurance coverage in order to maintain a certain premium or policy amount. In other words, the price that an employer pays for a particular insurance policy often depends on the number of employees it has. If the number of employees drops below a certain level, the price of the policy may increase. Under these circumstances, some employers require employees to sign up for health insurance coverage.

However, a different issue arises when and if the employer requires that the premium for mandatory health insurance coverage be deducted from the employee's paycheck. The key to this issue is whether or not the law authorizes such a deduction.

For example, in Arizona, an employer cannot withhold any portion of an employee's wages unless the employer has obtained written authorization from the employee for the withholding, or there is a reasonable good faith dispute as to the amount of wages owed. Similarly, in California, the general rule is that an employer can only withhold wages when it has obtained prior written authorization from the employee. Even with a written authorization, wages can only be withheld for specific items, as defined by the law.

In New York, an employer may only make deductions "for the benefit of the employee," which, aside from those required by law, are limited to those that are expressly authorized in writing by the employee. And, under New York law, even with an authorization, permissible deductions are very limited and specifically defined, and these deductions can amount for no more than 10 percent of the gross wages due to the employee for a particular payroll period.

Therefore, under these laws, if the employer does not obtain written authorization from the employee for the withholding of the health insurance premium, such a deduction arguably would not be permissible.

Different rules apply to employees performing work under federal contracts. For instance, under federal construction contracts there are limitations as to the sorts of deductions that can be made without first obtaining the Secretary of Labor's approval. However, there are other kinds of payroll deductions that a contractor or subcontractor can make, including contributions on behalf of an employee to funds established by the employer, representatives of employees, or both, to provide medical or hospital care, or for insurance to provide medical or hospital care, without first applying to the Secretary of Labor for approval.

Even these deductions, though, are not permitted unless a) the employee voluntarily consents to the deduction in writing before the period in which the work is to be done, and the consent is not a condition either for obtaining or retaining employment, or b) the deduction is provided for in a bona fide collective bargaining agreement.

Thus, given these general rules and absent some other specific state or federal law that may apply, if an employer is going to require its employees to sign up for health insurance coverage, the better practice would be to obtain written authorization first.

Leigh Ann Cicccarelli contributed to this article.

Note: The information in this column is provided by the author, not Entrepreneur.com. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.


Larry Rosenfeld is co-chair of the national labor and employment practice of the law firm Greenberg Traurig LLP. A frequent writer and lecturer on employment law topics, Rosenfeld is experienced in the areas of federal laws pertaining to employment issues, EEOC, ADA, termination matters, employment liability and the Fair Labor Standards Act.

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