Agency FAQs on tobacco surcharges may not slow pace of lawsuits 

On August 26, the Departments of Labor, Health and Human Services, and Treasury released ACA FAQs Part 74, prompted by dozens of class-action lawsuits challenging the tobacco surcharges some employers add to premiums for their group health plans through workplace wellness programs.  

The FAQs announce a nonenforcement approach to wellness programs that provide a reward — or the absence of a penalty — prospectively only. The FAQs also address plan disclosure obligations. While the FAQs are good news for plan sponsors, they are unlikely to slow the pace of tobacco surcharge lawsuits.

As a reminder, HIPAA bans discrimination based on a health factor — health status, medical condition, or disability — in group health plans, except in a wellness program meeting certain requirements. There are two categories of HIPAA wellness programs:

Participation-based programs:

• Reward (aka incentive) is not conditioned upon a health factor
• Reward is available to all similarly situated individuals
• Examples include health coaching, diagnostic testing, no-cost education seminars, health risk assessments

Health-contingent programs:

• Activity-based program with reward contingent upon participating in an activity like walking, diet, or exercise programs
• Outcome-based program with reward contingent upon attaining or maintaining a specific health outcome like meeting a target BMI or weight, abstaining from tobacco/nicotine use, or achieving specific biometric screening results

A tobacco surcharge in a group health plan is considered an outcome-based, health-contingent wellness program.

Over the last few years, more than 75 cases have been brought against employer plan sponsors alleging they improperly charged higher premiums to members using tobacco. Under HIPAA, employers can differentiate employee premiums based on tobacco use, but only if five statutory requirements are met. In nearly all of the cases, plaintiffs allege failures related to two of the five statutory requirements, specifically:

• Providing the full reward to plan members who complete a tobacco cessation program
  
  
• Disclosing the availability of a reasonable alternative standard in all plan materials describing the wellness program

FAQs Part 74 address both of these requirements in employers’ favor:

• Full reward. Until further guidance is issued, the Departments will not take enforcement action against a plan for failure to provide a reward retroactively to the beginning of the plan year. The Departments note the need for enforcement discretion because of requests for clarification from plans and issuers. In the preamble to the 2013 final rules, the Departments interpreted “full reward” to mean that the reward must be retroactive to the beginning of the plan year, rather than only prospective from the time the individual satisfies the required reasonable alternative standard. But the regulatory text doesn’t clearly require retroactive application of the reward.

• Disclosure requirement. Disclosure of the availability of a reasonable alternative standard is not required in plan materials that merely mention a wellness program without describing its terms. For example, a summary of benefits and coverage that notes cost-sharing variations based on tobacco use or participation in an outcome-based wellness program would not trigger the disclosure requirement. This FAQ is consistent with the Departments’ earlier interpretation, in the preamble to the 2013 final rules.

It is important to note that individuals have a right to sue for HIPAA violations even when the Departments provide enforcement relief, and these FAQs are unlikely to end the wave of tobacco surcharge litigation.

Following the Supreme Court’s 2024 Loper Bright decision, the lower courts are grappling with how much weight to give federal regulations, resulting in a tangle of different decisions. So far, a number of cases have settled — some agreeing to multimillion-dollar settlements — following the defendant-employer’s failure to get the case dismissed. Although the new FAQs aren’t dispositive, courts may now take them into consideration along with the law and regulations.

Tobacco surcharge cases are currently pending in the First, Second, Sixth, Seventh, and Eighth Circuit Courts of Appeal. It’s unclear which will come first: formal guidance from the Departments — they haven’t indicated any is on the horizon — or binding decisions from the appellate courts unless and until the issue is decided by the Supreme Court. Until then, the safest route forward for a wellness program, particularly a tobacco surcharge, is spelled out in our blog, Tobacco surcharges done right reduce litigation risk.

Note that since we published that earlier blog on tobacco surcharge litigations, plaintiffs have included fiduciary breach claims in their allegations, part of a broader litigation trend. If you need a refresher on ERISA fiduciary obligations, check out our blog, ERISA fiduciary or not — where should employers start?