Tobacco Surcharge Lawsuits Lighting Up Common Wellness Program Designs

A new and unprecedented wave of class action complaints is targeting a common feature of many employer-sponsored benefit plans: tobacco-user surcharges. These surcharges are often part of a wellness program that charges higher medical plan premiums to participants who fail to certify that they do not use tobacco products. As we reported earlier this year, employers who charge lower premiums for their benefit plans based on wellness program participation (including tobacco-user surcharges) should be aware of this uptick in litigation activity and ensure that their programs comply with all relevant regulations.

Background

HIPAA generally prohibits group health plans from discriminating based on health status. This common-sense provision ensures that all participants have access to the same medical benefits – regardless of their health. However, the statute contains an important exception that allows plans to charge different premiums “in return for adherence to programs of health promotion and disease prevention.” Consistent with this statutory exception, the Department of Labor, Department of Health & Human Services, and Internal Revenue Services issued tri-Agency regulations (the “HIPAA Wellness Regulations”) that provide detailed instructions for compliance with this exception. 

The HIPAA Wellness Regulations have been around for more than a decade. Nevertheless, the recent barrage of class action complaints accuses plans of allegedly failing to adhere to these regulations when designing their tobacco-user surcharges. For example, many of the complaints allege that employers have not offered a “reasonable alternative” method for obtaining the tobacco-free rate in the manner required by the HIPAA Wellness Regulations.

To further complicate the compliance landscape, many common wellness program designs are simultaneously subject to an entirely separate regulatory scheme under the Americans with Disabilities Act. Even the federal tax code is potentially in play; the IRS has issued guidance reminding employers to treat wellness program rewards as taxable income unless they can be excluded from income. For example, if an employee pays $20 less per pay period toward the cost of health coverage (or receives a $20 gift card) in exchange for completing a wellness activity, that amount must be imputed as taxable income.

Next Steps

Plan sponsors that have implemented wellness programs as part of their employee benefit plans (including tobacco-user surcharges) should immediately review their designs to confirm that they comply with all applicable regulations. While the litigation activity has focused primarily on tobacco-user surcharges, the attention could spread to other types of premium reductions – e.g., lower premiums for vaccinated employees. Accordingly, this review should look at the totality of the plan’s wellness program offerings, not just tobacco-related surcharges.  

Attorneys in Ballard Spahr’s Employee Benefits and Executive Compensation Group and Litigation Department are available to assist clients at all stages of their compliance needs—from employers looking to assess risk in their wellness programs to those who have just been served with a class action complaint.

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