Legality of Continued HMO “Exposure-Fee” Deductions After the Removal of a Dependent (Philippine Perspective, 2025)
Abstract
When an employee removes a spouse, child, or parent from the company-sponsored health-maintenance-organization (HMO) plan, the employer sometimes keeps on subtracting a fixed “exposure fee” from the employee’s wages until the policy year ends. Whether that practice is lawful depends on (1) the Labor Code rules on wage deductions, (2) Insurance-Commission (IC) requirements on HMOs, (3) contractual undertakings in the employment agreement, CBA, or HMO master policy, and (4) tax and fringe-benefit regulations. This article surveys every governing issuance up to 12 June 2025, synthesises DOLE and IC opinions, and proposes compliance checklists and remedies.
I. The Business Mechanics Behind the Fee
- Annual, non-cancellable blocks. HMOs price corporate accounts on a head-count basis, binding the employer for a 12-month premium whether or not a particular dependent later exits.
- True “exposure fee.” Some HMOs let employers pay a small variable surcharge (₱50-₱250/month) that is supposed to float with the enrollee list; others treat the entire dependent premium as earned upfront.
Knowing which pricing model applies is crucial: If the master policy expressly allows mid-year deletion with premium credit, continued payroll deductions are almost certainly impermissible.
II. Governing Legal Framework
| Source | Key Rule | Effect on the Issue |
|---|---|---|
| Labor Code, Arts. 113–116 (renumbered Arts. 117–120 by R.A. 10151) | No deduction from wages unless (a) authorized by law; (b) the employer is insured and the deduction is necessary; or (c) the employee gives written, informed consent for a specific amount and period. | Any post-removal deduction must fit one of the three grounds. |
| E.O. 192 (2011) + IC Circular Letters 2015-31, 2016-41, 2017-08, 2022-34 | Transfer of HMO supervision from DOH to Insurance Commission; requires HMOs to state refund and cancellation terms plainly and to honor prorated refunds “if contractually provided.” | Employers cannot invoke “no-refund” to justify deductions if the HMO itself must refund unused premium. |
| BIR R.R. 5-2011 & 8-2018 (Fringe Benefit Tax) | Employer-paid HMO premiums for dependents are fringe benefits; employee-paid portions are post-tax—unless the plan qualifies as a “group insurance plan” under R.R. 8-2018. | Misclassification may make the continued deduction doubly unlawful (wage deduction + tax error). |
| R.A. 11223 (Universal Health Care Act) & PhilHealth Circulars | PhilHealth is mandatory; HMO coverage for dependents is purely voluntary. | No statutory mandate lets an employer continue charging an employee after the dependent is gone. |
| Data Privacy Act (R.A. 10173) | Processing health data requires consent; retention beyond purpose violates the Act. | Continuing deductions tied to no-longer-enrolled dependents may constitute unnecessary data processing. |
III. Contractual Configurations
- Pure Employer-Pay. If the company shoulders 100 % of dependent premiums, no wage deduction arises.
- Cost-Sharing. If the employee and employer split the premium, the employee’s advance written authorization covers the specific peso amount and duration (usually one policy year).
- Exposure-Fee Model. The master policy or CBA commonly says “cancellable at any time with prorated credit.” When the employer chooses to absorb that credit instead of passing it to the employee, it raises a conversion issue (company benefit converted to employer gain).
IV. Continued Deduction Scenarios
| Scenario | Legality | Explanation |
|---|---|---|
| A. Dependent removed mid-year; master policy allows prorated refund; employer keeps deducting. | Illegal | Violates Art. 117 (no legal or employee consent once premium no longer due). Possible unjust enrichment. |
| B. Master policy does not allow any refund; premium considered earned upfront; removal only affects next policy year. | Generally legal if the employee’s original authorization covered the whole year and disclosed the “no-refund” clause. | The deduction represents a debt incurred when the plan was taken out. |
| C. Employee revokes consent in writing; employer has not yet paid the annual premium in full (month-to-month remittance). | Illegal to continue deducting because there is no longer consent and the employer can stop future remittances. | |
| D. Deduction continues after policy anniversary date (new policy year) without fresh consent. | Illegal (lack of renewed written authorization). |
V. DOLE and IC Administrative Guidance
- IC Opinion, 14 Jan 2019 (Query re: Mid-year Deletion) – HMOs may apply short-rate factors only if stipulated; otherwise, refund unused portion.
- DOLE-BWC Advisory, 24 Oct 2020 – Wage deduction for HMO must be “determinable and fixed at the time consent is given.” Variable exposure fees require a standing but revocable authorization, and any change must be re-explained to the employee.
- NLRC Rulings (e.g., Atty. Cabales v. TelTech, NLRC LAC No. 01-001620-20) – Continued HMO deduction after an employee’s marriage annulment (dependent removed) was held to be an illegal deduction; back-wages ordered returned with 10 % interest.
VI. Tax and Accounting Angle
- Employer as HMO policyholder. If refunds are credited to the employer’s account, applying that credit to reduce its future corporate premium while still deducting from employees creates a taxable fringe benefit equal to the amount effectively shouldered by employees but later recovered by the company.
- Employee as sub-policyholder. Where the contract says the employee “owns” the dependent coverage, any refund must flow to the employee; failure to return it risks penalties under the NIRC for failure to remit taxes withheld, because technically the employer is holding wages in trust.
VII. Remedies for Employees
| Remedy | Venue & Timeline | Outcome |
|---|---|---|
| 1. Payroll Correction Request | HR / Payroll Dept., internal within 30 days of discovery | Quick adjustment, retro refund. |
| 2. Grievance Procedure / CBA | Union & Mgmt.; timelines per CBA | May lead to policy-level change. |
| 3. DOLE SEnA (“single-entry assistance”) | File within 3 years under Art. 306 | Facilitate settlement; no filing fee. |
| 4. NLRC Money Claim | 3-year prescriptive period | Judgment for refund + 10 % interest. |
| 5. IC Administrative Complaint | No prescriptive period stated; practical within policy year | Directs HMO to refund employer/employee; may impose fines on HMO. |
VIII. Compliance Checklist for Employers
- Master Policy Review – Ensure refund and cancellation clauses are explicit; negotiate prorated terms during renewal.
- Consent Language – Use renewable and amount-specific wage-deduction authorizations; require fresh signatures every policy year or upon any premium change.
- Mid-Year Changes SOP – Document dependent removals; compute prorated credit; adjust payroll the same cut-off.
- Recordkeeping – Keep signed authorizations, HMO billing statements, and refund memos for at least 5 years (IC Cl. 2017-08).
- Tax Reconciliation – Coordinate Finance and Payroll to avoid unintended fringe-benefit tax liabilities when refunds occur.
IX. Best-Practice Clauses
“In case a dependent is removed during the coverage period, the Company shall cease payroll deductions on the next pay cycle. Any premium already deducted but later refunded by the HMO shall be returned to the Employee within thirty (30) days from the Company’s receipt of the refund.”
X. Conclusion
Under Philippine law, continued collection of HMO “exposure fees” after a dependent has been validly removed is unlawful unless all three of the following are true:
- The applicable HMO master policy makes the premium absolutely non-refundable;
- The employee gave informed, written consent that expressly covered the full, non-refundable premium for the entire policy year; and
- The deduction stops automatically at the next annual renewal unless fresh consent is secured.
Absent those conditions, the employer risks administrative fines (DOLE, IC), civil liability for money claims, and even tax exposure. Prudent employers should build transparent opt-out mechanisms and prorated refund protocols; employees should act promptly to document their revocation of consent and, if needed, invoke DOLE’s summary remedies.
Disclaimer: This article is for academic and informational purposes only and does not constitute legal advice. For specific cases, consult a Philippine lawyer or the appropriate regulatory agency.