We have written several blogs over the years addressing whether employers can charge employees more for health coverage if they use tobacco. The short answer is yes, but only if the surcharge satisfies HIPAA and Affordable Care Act wellness program rules. Since then, employers sponsoring tobacco surcharge programs have found themselves increasingly defending class action litigation alleging that their programs failed to satisfy wellness program requirements. In response, the Departments of Labor, Treasury, and Health and Human Services (“Departments”) recently issued new guidance addressing some of the most common compliance questions surrounding tobacco surcharges and other health-contingent wellness programs.
A Quick Refresher on Tobacco Surcharges
HIPAA generally prohibits group health plans from charging different premiums based on an individual's health status. However, an exception allows employers to offer incentives through wellness programs designed to promote health or prevent disease. Tobacco surcharge programs fall into this category.
To satisfy the wellness program exception, employees must have a reasonable opportunity to avoid the surcharge or opt into a reasonable alternative at least once per year. A reasonable alternative is a way to earn the reward (e.g., a lower health plan premium). A reasonable alternative is often a smoking cessation program, but other alternatives could be made available as well.
One issue that has generated significant confusion is whether employers must refund tobacco surcharges collected earlier in the year when an employee later completes a smoking cessation program. The preamble to the final regulations issued in 2013 suggested employees should receive the "full reward," leading some (especially some plaintiffs’ attorneys) to conclude that surcharges had to be refunded retroactively to the beginning of the plan year to ensure that all participants who qualified for the reward during the plan year actually received the benefit. In 2014, the Departments issued an FAQ clarifying that if a participant is provided a reasonable opportunity to enroll in a reasonable alternative standard at the beginning of the plan year and qualify for the reward (i.e., avoiding the tobacco premium surcharge) under the program, the plan is not required (but is permitted) to provide another opportunity to qualify for the reward until renewal or reenrollment for coverage for the next plan year. This caused greater confusion and has led to many recent lawsuits.
The Updated Guidance
ACA FAQ Part 74 now provides welcome relief. The Departments acknowledged that the regulations do not clearly require retroactive application of the reward and announced they will not take enforcement action against plans that apply the reward prospectively after an employee satisfies a reasonable alternative standard. In other words, if an employee completes a tobacco cessation program during the plan year, the employer generally may stop applying the surcharge going forward without refunding surcharges previously collected that year.
The new guidance does not eliminate all compliance concerns. The FAQ emphasizes that wellness programs still must be “reasonably designed to promote health or prevent disease,” and cannot operate as “subterfuge for discrimination or underwriting based on a health factor.” Employers should continue to review their tobacco surcharge programs, plan documents, enrollment materials, and communications to confirm that a compliant reasonable alternative standard is available and properly disclosed to participants. If you are considering implementing a surcharge, any member of our employee benefits team would be happy to assist you in designing a compliant approach.
