Numerous class-action lawsuits have recently been filed against employers alleging that health plan premium surcharges related to tobacco use violate federal compliance requirements. These lawsuits have been filed by current and former employees of major U.S. companies, such as PepsiCo, Walmart, Target, and Whole Foods, who have paid more in premiums due to their tobacco use—often hundreds of dollars more per employee per year.

Alleged Violations

The lawsuits assert that the health plans violated HIPAA’s nondiscrimination rules by:

• Not offering a reasonable alternative standard to avoid the surcharge (or only applying the premium reduction on a prospective basis after completing the alternative standard)
• Not describing the availability of the alternative standard in all plan materials

Some lawsuits also assert that the collection of the tobacco premium surcharge was a breach of fiduciary duty under ERISA. The lawsuits request various forms of relief, including:

• Reimbursing employees who paid the surcharges (with interest)
• Disgorging any benefits or profits
• Paying all attorney fees and costs

Legal Compliance Requirements

Employers may impose premium surcharges related to tobacco use if certain compliance requirements are met, including HIPAA’s nondiscrimination rules. Employers should ensure:

• A reasonable alternative standard is made available to qualify for the full reward
• The surcharge and alternative standard are communicated in all plan materials

Highlights

• Numerous class-action lawsuits have been filed against large companies that impose tobacco surcharges.
• These surcharges require employees who use tobacco to pay higher health plan premiums.
• The lawsuits allege that the surcharges violate HIPAA because employees weren’t offered or informed about alternative standards.
• HIPAA requires that reasonable alternatives must be available and disclosed in all plan materials.
• Employees who meet alternative standards must receive the full reward.

HIPAA Requirements

Employers commonly require tobacco users to pay an additional charge for health plan premiums. To comply with federal law, tobacco surcharges must be part of a wellness program that meets HIPAA’s nondiscrimination requirements.

HIPAA divides wellness programs into two categories:

Participatory Programs

These remove the surcharge if employees participate in an activity (e.g., attending a smoking cessation class), regardless of whether they quit using tobacco.

Health-contingent Programs

These only remove the surcharge for employees who satisfy a health-related standard (e.g., not using tobacco).

Health-contingent Programs Must Meet 5 Standards:

1. Frequency of opportunity: Eligible individuals must be provided the opportunity to qualify for the reward at least once per year.
2. Size of reward: Cannot exceed 30% of total coverage cost (50% for tobacco-related programs).
3. Reasonable alternative standard: Must be provided for individuals who do not meet the health standard. For example, attending a smoking cessation class.
4. Reasonable design: The program must have a reasonable chance of improving health or preventing disease and not be overly burdensome.
5. Employee notice: Disclosure of the alternative standard must appear in all plan materials, including:
   • Contact information for accessing the alternative standard
   • Statement that recommendations of the employee’s personal physician will be accommodated

More info: Federal Register - 2013 HIPAA Wellness Regulations

Enforcement and Penalties

The Department of Labor (DOL) has actively enforced these rules:

• 2018: Employer reimbursed $145,635 in tobacco surcharges; paid $14,563 penalty to the federal government.
• 2023: Employer reimbursed $96,440 total (including $79,780 before settlement); paid $13,422 penalty.
• Bass Pro Shops: Reached a $4.95 million settlement over HIPAA violations regarding the tobacco surcharge.

Relevant cases:

• DOL Release – 2018
• DOL Release – 2023

Action Items

• Review your health plan's use of tobacco surcharges.
• Confirm that a reasonable alternative standard is in place.
• Ensure all plan materials clearly describe the surcharge and alternatives.

Provided to you by ThinkTank Insurance Partners