Summary: In the wake of a recent Department of Labor (DOL) investigation, lawsuit, and resulting penalties against a group health plan for impermissible tobacco-use surcharges, group health plans are advised to tread carefully when imposing tobacco-use surcharges in their group health plan premiums.
Read on for more information.
Recent DOL Investigation & Lawsuit
A recent DOL investigation and subsequent lawsuit against an employer sponsoring a group health plan resulted in restitution to impacted plan participants and other violation penalties.
On September 13, 2023, a federal judge in Illinois entered a consent order and judgment requiring the employer to reimburse impacted group health plan participants for federal regulation violations. Click here for the DOL webpage announcing this development.
An investigation by the DOL’s Employee Benefits Security Administration (EBSA) determined the employer violated regulations under the Health Insurance Portability and Accountability Act (HIPAA) when it imposed a premium surcharge on plan participants disclosing their tobacco use on health benefit enrollment forms. The employer did not inform the plan participants that a reasonable alternative standard existed under the plan, which would have allowed them to avoid paying the tobacco-use surcharge. The court judgment requires the group health plan to pay $16,660 to the affected plan participants.
In addition to the tobacco-use surcharge violations, the group health plan also violated the Employee Retirement Income Security Act (ERISA) by failing to comply with the health plan’s governing documents and federal regulations, resulting in ERISA penalties and reimbursement to the impacted plan participants.
Tobacco-use Surcharges & HIPAA Rules
Some employers incorporate smoking cessation programs into their wellness programs as a way to encourage employees to quit smoking or using tobacco products.
A wellness program that incorporates a group health plan reward, such as a tobacco-use surcharge to the group health plan premiums for smokers or a discount on plan premiums for nonsmokers, is considered a health-contingent wellness program[1]. Accordingly, the program must satisfy nondiscrimination rules under HIPAA, including the following five requirements for wellness programs that require satisfaction of a standard related to a health factor:
- Frequency: The program provides eligible individuals the opportunity to qualify at least once per year.
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Amount: The program limits the maximum total reward to 50% of the total cost of coverage under the plan. This 50% threshold is applicable to wellness programs that are designed to prevent or reduce tobacco use.[2] The reward limit is based on total cost of self-only coverage.
However, if dependents, such as spouses, participate in the program, the reward can be based on total cost of coverage (employer cost + employee contributions) in which an employee and any dependent are enrolled.
- Purpose: The program must be reasonably designed to promote health or prevent disease. The program cannot be:
- overly burdensome;
- a device for discriminating based on a health factor; or
- highly suspect in the method chosen to promote health or prevent disease.
- Availability & Reasonable Alternative Standard: The full reward under a health-contingent wellness program must be available to all similarly situated individuals. Moreover, the program must provide a reasonable alternative standard (or waiver of the otherwise applicable standard) for the full reward for all individuals who do not meet the initial standard (i.e., those who smoke or use tobacco products).
Reasonable Alternative Standard Example*
As part of its annual enrollment period, a group health plan provides a premium differential based on tobacco use, determined using a health risk assessment.
The plan accommodates participants who smoke by enrolling them in, and paying for, a smoking cessation program. Any plan participant can avoid the surcharge for the plan year by participating in the program, regardless of whether that participant stops smoking. However, the plan can require a participant who wants to avoid the surcharge in a subsequent year to complete the smoking cessation program again.
* DOL Reg. §2590.702(f)(4), Example 6.
- Employee Notice: Plan must disclose the availability of a reasonable alternative standard to qualify for the lower premium (and, if applicable, the possibility of a waiver of the otherwise applicable standard) in all plan materials describing the terms of a health-contingent wellness program.
The following sample language found in the 2013 final HIPAA nondiscrimination rules, or substantially similar language, can be used to satisfy this notice requirement:
“Your health plan is committed to helping you achieve your best health. Rewards for participating in a wellness program are available to all employees. If you think you might be unable to meet a standard for a reward under this wellness program, you might qualify for an opportunity to earn the same reward by different means. Contact us at [insert contact information] and we will work with you (and, if you wish, with your doctor) to find a wellness program with the same reward that is right for you in light of your health status.”
Employer Impact
This recent DOL investigation, lawsuit, and resulting penalties serve as a timely reminder to employers who incorporate tobacco-use surcharges into their wellness programs. These employers are advised to ensure that their wellness program incorporating a tobacco-use surcharge complies with all five of the key requirements for a health-continent wellness program outlined above, particularly the reasonable alternative standard requirement.
Employers should be aware that failing to offer a reasonable alternative standard with a tobacco-use surcharge (incorporated as a group health plan reward) can lead to penalties. A prior lawsuit and settlement from 2018, requiring an employer to pay restitution of $145,635 to employees (along with accompanying ERISA violation penalties) for failing to offer the required reasonable alternative standard or waiver as part of its tobacco-use surcharge requirement, further underscores this concern.
Risk Strategies is here to help. Contact your Risk Strategies team members with any questions or contact us directly at benefits@risk-strategies.com.
[1] On the other hand, participatory wellness programs do not require individuals to meet a health-related standard to obtain a reward (or do not provide any reward). Generally, HIPAA requires only that the participatory wellness program be available to all similarly situated individuals.
[2] If the wellness program does not apply to tobacco-use use prevention or reduction, the maximum total reward threshold is 30% of the total cost of coverage.
