Link to Key Takeaways Key Takeaways
- No retroactive refund required. FAQ Part 74 confirms that employers are not required to provide retroactive rewards or remove tobacco surcharges for the period before a participant completes a reasonable alternative standard, such as a tobacco cessation program. Prospective-only rewards satisfy the regulatory framework.
- Enforcement relief, not litigation immunity. The Tri-Agencies (DOL, HHS, Treasury) announced they will not take enforcement action against compliant plans that provide rewards only after a participant satisfies the alternative standard. However, private plaintiffs may still pursue ERISA class actions based on notice deficiencies, program design, or fiduciary claims.
- Disclosure obligation is limited. The reasonable alternative standard must be disclosed only when plan materials actually describe the terms of the wellness program. A summary of benefits and coverage (SBC) that merely notes cost sharing may vary based on wellness participation does not trigger the disclosure requirement.
On August 26, the U.S. Departments of Labor, Health and Human Services, and the Treasury (the Tri-Agencies) jointly issued FAQ Part 74, new guidance addressing HIPAA wellness program rules under the Affordable Care Act (ACA). The guidance responds directly to questions raised by the wave of class action lawsuits challenging tobacco surcharges that some employers impose through workplace wellness programs and clearly states that employers are not required to offer retroactive rewards or removal of penalties where participants complete a reasonable alternative standard in the middle of a plan year under a properly designed wellness program.
Link to Background: HIPAA Wellness Program Rules Under the ACA and Tobacco Surcharge Class Action Litigation Background: HIPAA Wellness Program Rules Under the ACA and Tobacco Surcharge Class Action Litigation
HIPAA, as amended by the ACA, generally prohibits group health plans from discriminating against individuals with respect to eligibility, benefits, or premiums based on an individual’s health factor. However, the relevant statute also provides an exception to HIPAA’s non-discrimination rules for wellness programs that offer premium discounts, rebates, or other rewards in return for health promotion and disease prevention activities. The Tri-Agencies’ 2013 final wellness regulations (2013 Regulations) require that, to meet this exception, outcome-based wellness programs, which require an individual to attain or maintain a specific health outcome (e.g., not using tobacco), satisfy specific requirements, including:
- Any reward must be limited to no more than 30% of employee-only coverage cost (or 50% for tobacco programs).
- A reasonable program design.
- A reasonable alternative standard for individuals who cannot meet the initial standard.
- Disclosure of the alternative standard in all plan materials describing the program’s terms.
Link to How Do Employer Tobacco Surcharge Programs Work? How Do Employer Tobacco Surcharge Programs Work?
Many employers maintain wellness programs specifically designed to discourage the use of tobacco among participants in their group health plans. Some programs penalize plan participants for using tobacco by imposing a surcharge on the cost of group health plan premiums. Other programs provide a reward (usually in the form of a discount on group health plan premiums) for those who do not use tobacco. Collectively, the 2013 Regulations refer to surcharges and rewards as “rewards.”
In either scenario, employers are required to offer a reasonable alternative way that tobacco users can earn the reward, referred to as the “reasonable alternative standard.” The most common reasonable alternative standard related to tobacco use is completion of a tobacco cessation program.
Link to Retroactive Rewards in the 2013 Regulations Retroactive Rewards in the 2013 Regulations
However, there was an inherent conflict in the 2013 regulations about the amount of the reward required upon completion of the reasonable alternative standard: The 2013 Regulations preamble stated that when a participant satisfies a reasonable alternative standard mid-year (e.g., completes a tobacco cessation program in April), the plan should provide the full reward retroactive to the beginning of the plan year. The 2013 Regulations themselves were silent.
Link to Plaintiffs Are Bringing Tobacco Surcharge Class Action Claims Plaintiffs Are Bringing Tobacco Surcharge Class Action Claims
Where there was confusing smoke, the plaintiffs’ bar saw fire, bringing a significant surge of putative ERISA class actions with respect to tobacco-focused wellness programs. In these cases, plaintiffs typically allege that, among other things, plans:
- Failed to provide the “full reward” by not retroactively granting a reward upon mid-year completion of the tobacco cessation programs.
- Failed to disclose the reasonable alternative standard in all plan materials.
Employers have had mixed results in stamping out the flames of these lawsuits, with some district courts dismissing the class actions, rejecting the contention that ERISA requires retroactive reimbursement, and others allowing the claims to proceed. Appeals are pending before multiple circuit courts, but no appellate court has yet ruled on the merits.
Link to Key Guidance from FAQ Part 74 Key Guidance from FAQ Part 74
Link to Enforcement Relief on Retroactive Rewards. Enforcement Relief on Retroactive Rewards.
In FAQ Part 74, the Tri-Agencies acknowledge the language that implied rewards or surcharges be applied or removed retroactively appeared only in the preamble, not in the regulatory text.
Accordingly, the Tri-Agencies announced they will not take enforcement action against a plan or issuer that does not provide a reward retroactive to the start of the plan year, so long as the plan provides the reward for the period after the participant satisfies the reasonable alternative standard and otherwise complies with the wellness program regulations.
Note that FAQ 74 does not eliminate any other HIPAA wellness program requirement; plans must otherwise remain compliant with the 2013 Regulations.
Link to Disclosure of the Reasonable Alternative Standard. Disclosure of the Reasonable Alternative Standard.
FAQ Part 74 confirms that the reasonable alternative standard disclosure requirement is triggered only when plan materials describe the terms of the health-contingent wellness program. A summary of benefits and coverage (SBC) that merely notes cost sharing may vary based on participation in a wellness program—without describing program standards—does not trigger the disclosure obligation.
Link to Strengthens Plan Sponsor Positions, But Not a Safe Harbor Against Tobacco Surcharge Lawsuits. Strengthens Plan Sponsor Positions, But Not a Safe Harbor Against Tobacco Surcharge Lawsuits.
FAQ Part 74’s enforcement relief strengthens plan sponsors’ argument that prospective-only rewards satisfy the statutory and regulatory framework. However, FAQ Part 74 is not a complete litigation safe harbor. Private plaintiffs may continue to assert claims based on notice deficiencies, program design, fiduciary theories, and actual plan administration, regardless of the Tri-Agencies’ enforcement posture.
Link to Contact Us Contact Us
FAQ Part 74 provides welcome clarity and meaningful enforcement relief, but plan sponsors should proactively review their tobacco surcharge programs to mitigate ongoing litigation risk. For questions or additional information, contact any of the attorneys in our Employee Benefits Practice Group.