The nondiscrimination rules in federal laws such as the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Health Insurance Portability Accountability Act of 1996 (“HIPAA”) prohibit the consideration of “health factors” in providing employee health plans, and nondiscrimination rules are the focus of several court actions brought by employees that were subject to a tobacco-use surcharge on their premiums. Lawsuits filed in 2023 and 2024 claim that a tobacco surcharge violates the nondiscrimination rules by targeting groups of employees based on their health status (which employees subject to the surcharge are required to disclose).
Employer Action Items
- To comply with ERISA, employers and plan sponsors should structure an employee surcharge policy that retroactively reimburses the surcharge to the those that cease using tobacco mid-year or begin participation in a wellness cessation program mid-year.
- To comply with HIPAA, employers and plan sponsors are required to have a reasonable alternative standard available for participants who continue to smoke or use tobacco.
- Those who satisfy the alternative standard must receive the full reward.
- A reasonable alternative standard may include attending an education class or similar tobacco cessation program.
- To comply with HIPAA, the surcharge may not exceed 50% of the total cost of health coverage.
Summary
Tobacco use premium surcharges have become a staple of modern employer sponsored health and welfare plan coverages. These plan features require employees to self-identify as a tobacco user or non-tobacco user when enrolling for benefits. These surcharges are oftentimes (and should be) paired with a smoking/tobacco use cessation wellness incentive program. Enrollment in the cessation program typically serves as the required reasonable alternative standard, operating to provide the participant with the opportunity to obtain the full reward; in this instance, the reversal of the premium surcharge.
These federal cases question the surcharge itself, not the underlying wellness cessation program. Note that programs that do NOT use a medical test to screen for tobacco or nicotine (for example, a program that asks employees to sign affidavits about their tobacco use), the maximum tobacco surcharge allowed is 50 percent of the total cost of employee-only health coverage.
HIPAA nondiscrimination rules for wellness programs explicitly prohibit discrimination in terms of coverage or premiums based on “health status-related factors,” such as tobacco use. However, group health plans are permitted to adjust premiums, copays, and deductibles in exchange for participation in health promotion and disease prevention programs, as defined by 29 U.S.C. § 1182(b)(2)(B). These wellness programs are required to offer a “reasonable alternative standard” for participants who do not meet the initial criteria, such as current tobacco users.
By example, in one of the recent cases filed against Walmart, the plaintiffs’ contention is that the wellness plan’s compliance with HIPAA nondiscrimination standards requiring the availability of a reasonable alternative standard is unclear and/or avoidant, because the standard requires that the participants have the opportunity to earn the “full reward”. According to the complaint, this would necessitate reimbursing employees who complete the smoking cessation program for all penalties throughout the entire plan year. Furthermore, the lawsuit alleges that the employer failed to provide the requisite notice of a reasonable alternative standard “in all plan materials“, as these materials do not include information on how to obtain retroactive relief. Finally, the complaint asserts the employer breached its fiduciary duties while acting as the plan’s administrator.
In related litigation from 2023, the DOL asserted that a group of employers charged a tobacco surcharge, but failed to:
- Provide an alternative standard (reasonable or otherwise) by which participants who used tobacco could obtain the premium discount; and,
- Failed to disclose to participants the availability of a reasonable alternative standard to qualify for the premium discount.
The Court entered a consent judgment that required the employer to reimburse its plan participants the amounts that they paid for the surcharges and assessed a civil monetary penalty against the employer.
As these cases make their way through the federal court system, the final word on whether the surcharges are discriminatory may lie with the U.S. Supreme Court.
Additional Resources
- https://www.heart.org/-/media/Files/About-Us/Policy-Research/Policy-Positions/Tobacco-Endgame/Tobacco-Surcharge-Policy-Statement.pdf
- https://www.lung.org/policy-advocacy/tobacco/cessation/tobacco-cessation-and-aca
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