Avoiding an Employee Lawsuit Over a Tobacco Surcharge Claim

Tobacco surcharges on health insurance premiums for employees who use tobacco products are attractive options for employers looking to keep their workforce healthy while lowering their organization’s healthcare costs. 

But surcharges can go too far, and many employers may be unaware of the limitations.

To assist employers in applying premium increases in compliance with federal regulations, Alera Group has produced the whitepaper Tobacco Surcharges: Wellness Program Compliance Considerations. A comprehensive yet concise guide to this risk management option for group health plans, the paper:

• Details requirements for implementing a tobacco surcharge as part of a health-contingent wellness program;
• Outlines the administration of a reasonable alternative standard;
• Offers practical considerations for implementing a tobacco surcharge;
• Provides a warning about the potential of litigation.

Courts ablaze with class-action lawsuits

Over the past few months, there has been a large increase in the number of class-action lawsuits filed against large employers for improperly implementing tobacco surcharges in their wellness programs. These include large national employers such as Walmart, Tractor Supply Co., Macy’s and Target. 

These lawsuits vary slightly in their specific claims, but common allegations from plaintiffs include:

• The tobacco surcharges have unreasonable alternative standards to receive the benefit; 
• Participants are not receiving the benefit for the required plan year if they complete the reasonable alternative standard; 
• The amount of the tobacco surcharges is too expensive. 

Being fully informed about compliance requirements for implementation of tobacco surcharges is essential to reducing the risk of an employment practices liability (EPL) lawsuit.

Applicable federal regulations

Tobacco surcharges touch on issues under the Employee Retirement Income Security Act (ERISA), the Health Insurance Portability and Accountability Act (HIPAA) and the Affordable Care Act (ACA). 

Under HIPAA, the implementation of a tobacco surcharge is considered a health-contingent wellness program. Alera Group’s whitepaper explains the two types of health-contingent programs and outlines the five essential components a health-contingent, outcome-based wellness program must include if it also includes a tobacco surcharge.

Reasonable alternative standards

Employees who complete a wellness program’s reasonable alternative standard to avoid a tobacco surcharge must receive the entire benefit (the removal of the surcharge) retroactive to the start of the plan year. Additionally, employees who complete the reasonable alternative standard (usually in the form of completing a tobacco cessation course) must receive the entire benefit without the imposition of an additional requirement, such as actual cessation of tobacco use. 

Programs that meet federal requirements for a tobacco surcharge are permitted to calculate affordability under the ACA without including the surcharge in their calculation. Employers who violate compliance regulations, on the other hand, face the risk of fines and litigation.

Consultation and education

Regular compliance reviews can enable employers to snuff out concerns over potential EPL lawsuits. Alera Group employee benefits consultants excel at helping clients remain compliant with federal regulations. Reading our whitepaper on compliance considerations for tobacco surcharges is sure to help as well.

GET THE WHITEPAPER

About the author

Samantha Van Sumeren
Employee Benefits and Executive Compensation Consultant
Alera Group

A graduate of the University of Michigan and the University of Richmond T.C. Williams School of Law, Sam Van Sumeren joined Alera Group’s Employee Benefits Compliance staff in 2023 after five years as an associate attorney with the Michigan law firm Bodman PLC.

Contact information:

• sam.vansumeren@aleragroup.com
• Connect with Sam on LinkedIn