What steps can employers take to address litigation surrounding tobacco surcharge programs?

Question

We are aware of a recent wave of litigation against employers claiming their group health plans’ tobacco surcharge programs are discriminating against tobacco users, among other allegations. What steps should employers take to ensure these programs are in compliance with applicable law?

Answer

Tobacco surcharge programs must be implemented through a wellness program. Employers that impose a tobacco surcharge in addition to their group health plan’s regular employee contribution amount should work with legal counsel to ensure the terms of their wellness program comply with Health Insurance Portability and Accountability Act of 1996 (HIPAA) wellness program rules.

Background

Tobacco use is a health status factor protected under HIPAA rules on nondiscrimination in health status. As a result, any financial incentives (whether called a reward or a penalty) related to tobacco use or cessation must comply with the HIPAA wellness program requirements, as modified by the Affordable Care Act (ACA). The Equal Employment Opportunity Commission wellness rules also may apply if the tobacco surcharge program uses medical testing to screen for tobacco or nicotine.

In general, the HIPAA/ACA wellness rules prohibit a group health plan from discriminating between similarly situated individuals based on their health status. This means, among other things, that group health plans usually cannot charge individuals different premiums or impose different costs (i.e., through deductibles or co-pays) based on a health factor (such as smoker status).

However, employers may give premium discounts or impose premium penalties based on participation in programs intended to promote health and prevent disease. Wellness programs that require a participant to meet a set standard related to a health factor (such as tobacco surcharge programs) are considered “health-contingent wellness programs.” These types of programs must comply with the following five requirements:^[1]

1. Frequency of opportunity to qualify: Individuals must have the opportunity to qualify for the full reward at least once a year.
2. Size of the reward: The total amount of the reward cannot be more than 30% of the total cost of coverage for programs that do not include a tobacco-related incentive/surcharge or 50% of the total cost of coverage for programs that have a tobacco-related incentive/surcharge.
3. Reasonable design: The program must be designed to promote health and not act as a subterfuge for underwriting or reducing benefits.
4. Uniform availability and reasonable alternative standard (RAS): The wellness program may not ask for verification that the program requirements have been met that it is unreasonably difficult due to a medical condition or medically inadvisable. In addition, all employees or dependents (if covered by the wellness program) must be provided with a RAS (or a waiver of the otherwise applicable standard) upon request regardless of any medical condition or other health factor. Note that the full reward must be provided if the RAS is completed, even if the individual’s health outcome did not improve (e.g., even if the individual did not actually stop smoking after completing a tobacco cessation program).
5. Notice of availability of RAS: This notice must be included in all materials describing the terms of a wellness program. It must include contact information for obtaining the RAS and a statement that recommendations of an individual’s personal physician will be accommodated. Note that a specific RAS does not need to be provided in this notice, but the contact information where the individual can receive RAS information must be listed.

Recent litigation on tobacco surcharge programs

The recent lawsuits challenging employer group health plan tobacco surcharge programs allege that these programs violate the HIPAA/ACA wellness requirements as well as ERISA’s fiduciary standards. Allegations have included that:

• The program does not offer a RAS
• Employees cannot qualify for the full reward upon completion of the RAS (i.e., employees can only avoid the surcharge prospectively)
• The program does not provide adequate notification of the RAS

The complaints also allege that imposition of the tobacco surcharge is a breach of an employer’s fiduciary duty under ERISA (i.e., failing to act solely in the interest of plan participants and beneficiaries).

Takeaways

• Employers who impose a tobacco surcharge should be aware of the recently filed lawsuits and consult with their legal counsel to ensure they have in place a wellness program that complies with applicable wellness regulations.
• Employers should review the terms of their tobacco surcharge programs to ensure that each individual is eligible to receive the full reward upon completion of the RAS and that the RAS is adequately communicated to employees — with all materials discussing the surcharge.

Footnote

1. For more information on the rules that apply to employer tobacco surcharge programs, see “Is a tobacco surcharge a ‘wellness program’?” Insider, November 2023. Return to article undo