Tobacco Surcharges - Legal Rules

November 8, 2019

Employers may consider implementing a smoking cessation program to encourage their employees to stop smoking or using tobacco products. To motivate employees, these programs often include a tobacco surcharge. The surcharge is an extra charge on health plan premiums for tobacco users or a discount on health plan premiums for participants who do not smoke or use tobacco.

 

Smoking cessation programs that include tobacco surcharges must comply with federal rules for workplace wellness programs. Depending on how the program is structured, employers will need to consider their compliance obligations under two main federal laws—the Health Insurance Portability and Accountability Act (HIPAA) and the Americans with Disabilities Act (ADA).

 

Employers that do not comply with these federal rules may be subject to employee lawsuits and federal enforcement action by the Department of Labor (DOL) or Equal Employment Opportunity Commission (EEOC).

 

Tobacco Surcharges

Many employers implement smoking cessation programs to encourage their employees to stop smoking or using tobacco products. To engage employees in the program, employers often incorporate a tobacco surcharge in the form of:

  • An extra charge on health plan premiums; or

  • A discount on health plan premiums.

 

Smoking cessation programs are sometimes designed so that employees are rewarded for participating (for example, attending a smoking cessation class), regardless of whether they quit smoking or using tobacco. However, many programs offer a reward only to participants who do not smoke or use tobacco.

 

federal legal requirements

Smoking cessation programs that include tobacco surcharges must comply with federal rules for workplace wellness programs. Depending on how the program is structured, employers will need to consider their compliance obligations under two main federal laws—HIPAA and the ADA.  

 

Programs that fail to follow these federal rules may subject employers to employee lawsuits and federal enforcement action by the DOL or EEOC.

 

key compliance points

Employers that impose tobacco surcharges should review their smoking cessation programs to confirm that they comply with HIPAA and, if applicable, the ADA. Key compliance points that employers should consider include the following:

  • If the program imposes a tobacco surcharge based on whether participants smoke (or otherwise use tobacco), participants who request an alternative standard must be offered a reasonable one, or a waiver of the nonsmoking standard. Participants who meet the alternative standard must receive the full reward under the program.  

  • For programs that do NOT use a medical test to screen for tobacco or nicotine (for example, a program that asks employees to sign affidavits about their tobacco use), the maximum tobacco surcharge allowed is 50 percent of the total cost of employee-only health coverage. If dependents are also eligible to participate, the surcharge cannot exceed 50 percent of the total cost of coverage in which the employee and any dependents are enrolled.

  • Smoking cessation programs that use a medical test to screen for tobacco or nicotine are subject to the ADA’s rules for voluntary wellness programs. The EEOC previously established a 30 percent incentive limit for voluntary wellness programs. However, effective Jan. 1, 2019, the EEOC rescinded this incentive limit to be consistent with a federal court ruling that invalidated the limit. It is currently unclear how much of a tobacco surcharge can be charged when a medical test is used to screen for tobacco or nicotine.

     

     

     

     

     

     

     

     

     

 

In addition, employers should become familiar with any applicable state laws regarding discrimination protections for smokers when reviewing their smoking cessation programs for legal compliance. Note, however, that many of these nondiscrimination laws contain exceptions allowing employers to charge higher health insurance premiums to employees who smoke.

 

HIPAA Rules

A wellness program that incorporates a group health plan reward, such as a discount on insurance premiums for nonsmokers, must comply with HIPAA’s nondiscrimination rules. For compliance purposes, HIPAA divides wellness programs into two categories—participatory wellness programs and health-contingent wellness programs. A smoking cessation program that offers a tobacco surcharge will fall under one of these categories, depending on how the program’s surcharge is designed.

 

Participatory Wellness Programs

A smoking cessation program that does not provide a reward or rewards employees for participating, regardless of whether they smoke or use tobacco, is a participatory wellness program. Participatory wellness programs comply with HIPAA’s nondiscrimination requirements without having to satisfy any additional standards, as long as participation in the program is available to all similarly situated individuals, regardless of health status. There is no limit on financial incentives for participatory wellness programs.

 

Health-contingent Wellness Programs

A smoking cessation program that rewards participating employees for not smoking or using tobacco is a health-contingent wellness program. Health-contingent wellness programs are required to follow five standards related to nondiscrimination, including a standard that limits the maximum reward. Also, these types of wellness programs must offer a reasonable alternative standard for participants who do not stop smoking or using tobacco to qualify for the reward.

 

Size of Reward

Under HIPAA, wellness programs that are designed to prevent or reduce tobacco use may incorporate of a reward of up to 50 percent of the total cost of employee-only health coverage. Total cost includes both employer and employee contributions for the benefit package under which the employee is receiving coverage.

 

If, in addition to employees, any class of dependents (such as spouses) may participate in the health- contingent wellness program, the reward cannot exceed the specified percentage of the total cost of the coverage in which the employee and any dependents are enrolled (such as family coverage or employee-plus-one coverage). For health-contingent wellness programs that allow a class of dependents to participate, there are no special rules regarding apportionment of the reward among family members. Plans and issuers have flexibility to determine whether, and how, the maximum allowed reward or incentive will be prorated based on the portion of the premium or contribution attributable to that family member, as long as the method is reasonable.

 

Reasonable Alternative Standard

To comply with HIPAA, health-contingent wellness programs must provide a reasonable alternative standard (or waiver of the otherwise applicable standard) to qualify for the full reward for anyone who does not meet the initial standard (that is, those who smoke or use tobacco products). For example, the reasonable alternative standard could include attending educational classes or trying a nicotine patch.

 

Although an individual may take some time to request and satisfy a reasonable alternative standard, the same, full reward must be available to that person as is provided to individuals who satisfy the initial standard.

 

Plans have flexibility to determine how to provide the portion of the reward for the period before an alternative was satisfied (for example, payment for the retroactive period or pro rata over the remainder of the year), as long as the method is reasonable and the individual receives the full amount of the reward. If an individual does not satisfy the alternative standard until the end of the year, the plan may provide a retroactive payment within a reasonable time after the end of the year, but may not provide pro rata payments over the following year.

 

All facts and circumstances are taken into account in determining whether a plan or issuer has provided a reasonable alternative standard, including, but not limited to:

  • If the reasonable alternative standard is completion of an educational program, the plan or issuer must make the educational program available or assist the employee in finding a program (instead of requiring an individual to find a program unassisted) and cannot require an individual to pay for the cost of the program.

  • The time commitment required must be reasonable (for example, requiring attendance nightly at a one-hour class would be unreasonable).

 

Employee Notice

Plan materials describing the terms of the premium differential must disclose the availability of a reasonable alternative standard to qualify for the lower premium. This disclosure must also be included in any notice that an individual did not satisfy the wellness plan’s standard of not smoking or using tobacco products. The disclosure must include contact information for obtaining the alternative standard and a statement that recommendations of an individual’s personal physician will be accommodated.

 

The following sample language, 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.

 

ADA Rules

The ADA prohibits employers with 15 or more employees from discriminating against individuals with disabilities. Wellness programs that collect health information or involve medical exams must comply with the EEOC’s requirements for voluntary wellness programs, as described below.

 

The EEOC has provided guidance on how these requirements apply to wellness programs designed to prevent or reduce smoking or tobacco use:  

  • A wellness program that asks employees whether they smoke or use tobacco (for example, through an affidavit) is not a wellness program that includes disability-related inquiries or medical examinations. Thus, the ADA’s requirements for voluntary wellness programs (described below) do not apply to this type of program.

  • By contrast, a wellness program that tests for the presence of nicotine or tobacco (for example, through a blood or urine test) includes a medical examination. The ADA’s requirements for voluntary wellness programs (described below) apply to a wellness program that includes this type of screening.

     

     

     

     

     

     

     

     

     

This Compliance Overview is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.

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