New Federal Guidance on Tobacco Surcharges: Key Legal Updates for Insurers
Tobacco surcharge programs have come under increased scrutiny, prompting new federal guidance and highlighting ongoing legal challenges.
Federal regulators have addressed growing legal concerns around employer tobacco surcharge programs with new guidance, marking their first update on this subject since 2014. The Departments of Labor, Health and Human Services, and the Treasury have released FAQ Part 74, which offers clarification on health-contingent wellness programs under the Affordable Care Act (ACA) and the Health Insurance Portability and Accountability Act (HIPAA). This update comes as numerous class action lawsuits challenge these surcharges under the Employee Retirement Income Security Act (ERISA) nondiscrimination requirements.
Legal Landscape and Recent Settlements
As major employers face increased litigation over tobacco surcharges, legal firms are scrutinizing these programs under ERISA guidelines. Recently, Bass Pro Shops settled a case related to its surcharge program, demonstrating the legal vulnerability companies face. Although some lawsuits have ended in settlements, others continue to challenge the legality of these surcharges, with outcomes varying significantly across different courts. For instance, the US District Court for the District of Rhode Island dismissed one such case against Bally Management Group, yet similar cases remain active.
Key Clarifications in FAQ Part 74
FAQ Part 74 aims to clarify the timing of reward payments, a gray area in previous guidelines. Under the new guidance, if an employee completes an alternative standard, such as tobacco cessation, during the plan year, the reward can be applied from the time the alternative is met rather than retroactively from January 1. While this change provides flexibility to employers, it does not mandate retroactive rewards, allowing employers to decide their approach.
The guidance also specifies which plan materials must include information about these alternative standards. It mandates that any documents describing the terms of the wellness program or informing an employee about non-compliance must include the reasonable alternative standard notice. However, passing mentions of the program do not require full disclosure.
Implications for Benefits Brokers
FAQ Part 74's focus on payment timing rather than ERISA's nondiscrimination provisions means benefits brokers must engage employers in discussions about the broader compliance landscape. Although the new guidance reduces some compliance risks, brokers need to emphasize the continuing litigation risks associated with these programs. Ensuring that wellness plans accurately reflect regulatory requirements is crucial as the enrollment cycle approaches.
| Aspect | Explanation |
|---|---|
| Reward Timing | Rewards start when the alternative standard is met, not retroactively from January 1. |
| Plan Documentation | Must include notice of alternative standards; brief mentions exempt. |
Steps Forward for Industry Professionals
Insurance carriers, brokers, and compliance teams should closely review their current wellness programs in light of the new guidance. Ensuring adherence to the ACA limits and providing proper documentation will be crucial to managing legal risk. This updated regulatory environment calls for proactive measures, including reviewing wellness documents, confirming regulatory compliance, and advising clients on potential legal challenges. As these programs face ongoing litigation, staying informed and prepared can mitigate risks and support clients more effectively.