Over the past couple of years, numerous large employers and their health plan fiduciaries have faced lawsuits regarding their health plan’s tobacco surcharge. A tobacco surcharge wellness program typically charges a higher monthly premium to employees and covered dependents who smoke or otherwise use tobacco products to account for some of the higher medical costs associated with tobacco use. Tobacco users can typically avoid the surcharge by completing a smoking cessation program, regardless of whether they actually quit.
This wave of putative class action lawsuits began in 2024 even though employer tobacco surcharges have been around for years and the HIPAA regulations permitting the surcharges were last updated in 2013. Since then, numerous lawsuits challenging employer health plan tobacco surcharge programs have been filed. Courts have tended to side with employers, but rulings have been mixed.
These lawsuits typically allege that the employer and its health plan fiduciaries breached their fiduciary duties under ERISA by impermissibly discriminating against tobacco users by charging higher premiums because of some combination of the following: (i) the wellness program does not provide a compliant reasonable alternative standard because the individual must become tobacco free, (ii) a participant who completes the smoking cessation program alternative is not able to avoid the full amount of the surcharge for the plan year, and/or (iii) a reasonable alternative standard, such as a smoking cessation program, was not disclosed to participants. The 2013 HIPAA regulations require health plans that utilize a tobacco surcharge wellness program to provide a reasonable alternative standard that does not involve becoming tobacco-free and to enable individuals who complete the reasonable alternative standard to avoid the penalty or receive the reward.
These lawsuits have been surprising, and potentially problematic, for employers because tobacco surcharge wellness programs are a longstanding, common practice that has been permitted by HIPAA regulations. From a business perspective, imposing a tobacco surcharge is a reasonable way to pass along some of the extra medical costs associated with tobacco use to those who use tobacco.
In response to this wave of lawsuits, the DOL recently issued FAQ guidance confirming that employers do not have to refund previously imposed penalties or retroactively provide rewards with respect to employees who complete the reasonable alternative standard midyear. The DOL reasoned that any statements that may have indicated employers needed to provide the full reward contained in the preamble to the 2013 HIPAA regulations were not part of the regulations’ text. The DOL’s guidance directly rebuts one of the key allegations contained in these lawsuits. While the impact of the DOL’s guidance is not yet known, it could sway courts to rule in favor of employers and dissuade plaintiff’s attorneys from pursuing additional lawsuits when the reasonable alternative standard has been disclosed.
