Tobacco Surcharge on Health Insurance in Legal Crosshairs: Is Your Wellness Program Compliant?

Tobacco Surcharge on Health Insurance in Legal Crosshairs: Is Your Wellness Program Compliant?

There has been a flurry of activity lately involving employer wellness programs that impose a tobacco surcharge on health insurance.

Employees at several companies are pushing back on employer wellness programs that require higher health insurance premiums for tobacco users. Here are key things you need to know about tobacco surcharges and recent activity with lawsuits.

Tobacco surcharge by state

Even though federal law permits a tobacco surcharge on health insurance, some states prohibit this.

States that prohibit tobacco surcharges completely are California, Massachusetts, New Jersey, New York, Rhode Island, Vermont, and Washington, D.C. Connecticut also prohibits tobacco surcharges, but only for health plans sold in the state’s health insurance exchange (Access Health CT).

Other states like Kentucky, Arkansas, and Colorado allow a lower premium differential than federal law. Colorado limits the tobacco surcharge to 15%. Arkansas limits it to 20%, and Kentucky limits it to 40%.

Most states, however, follow the federal law and allow insurers to impose tobacco surcharges of up to 50% but employer wellness programs must follow certain rules for those surcharges to be legal.


5-factor test to legally charge a higher premium

Employees are hiring attorneys who are familiar with the wellness incentive rules under the Employee Retirement and Income Security Act (ERISA) and are challenging employer wellness programs that are allegedly not in full compliance.

To be in full compliance with the ERISA wellness incentive rules, wellness programs that impose a tobacco surcharge on employees who use tobacco must pass a 5-factor test. See details about the 5-factor test in my previous blog post, What Is a Tobacco Surcharge and How Does My Company Offer One?

The EX Program qualifies as a reasonable alternative standard and has helped over 940,000 tobacco users build the skills and confidence for a successful quit. To learn more, visit our Employers page.
Trending case #1: Secretary of Labor v. Macy’s, Inc.

In August 2017, the United States Department of Labor (DOL), which enforces compliance with ERISA, sued Macy’s, Inc. as well as its third-party administrators for its self-insured health plan:  Anthem Blue Cross Life and Health Insurance Company and Cigna.

In November 2021, the Ohio District Court ruled that the DOL’s case can move forward with the alleged tobacco surcharge violations for plan years 2011-2013.

Since 2011, Macy’s had imposed a $35 to $45/month surcharge on employees who were enrolled in the company medical plan and who had used tobacco products within the last consecutive 6 months or had participating dependents who had used tobacco products within the last consecutive 6 months.

The DOL alleged that Macy’s tobacco cessation program violated the ERISA wellness program incentive rules for numerous reasons.  In plan years 2011 and 2012, the program failed to offer employees a reasonable alternative standard and notice of that reasonable alternative standard.

Macy’s offered a tobacco cessation program to employees, but the only way to avoid the surcharge was for the employee to declare that all covered members in his or her family remained tobacco free for a period of six consecutive months during the health plan year.

During plan year 2013, Macy’s included a notice within the Tobacco Affidavit alerting the employee to the availability of a reasonable alternative standard, so it satisfied the notice requirement.  But Macy’s tobacco affidavit also said, “I understand that the tobacco surcharge will not be changed retroactively, and no refunds or credits will be issued.”

The DOL alleged that this refusal to refund or credit participants for the tobacco surcharge even if they met a reasonable alternative standard violated the ERISA requirement that the full reward be available to all similarly situated individuals of a wellness program.

Although third parties helped administer the tobacco cessation program for Macy’s, Macy’s had ultimate control of the wellness program, including:

  • Determining which participants were charged the tobacco surcharge
  • Determining which participants were reimbursed the tobacco surcharge
  • Withholding the tobacco surcharge from a participant’s paycheck and placing it in the health plan trust account; and
  • Directing the third parties regarding how completions of the tobacco cessation programs were reported.

Because of these alleged violations, the DOL is asking the court for the following relief (in relation to the wellness program violations):

  • to reimburse all participants who paid the tobacco surcharge from July 1, 2011, to the present (plus interest)
  • to revise its wellness program to comply with ERISA wellness incentive rules, to prevent Macy’s from collecting tobacco surcharges until it revises tis wellness program to comply with the ERISA rules
  • to empty all profits received as a result of its fiduciary breaches, and
  • to pay the costs the government incurred to bring the lawsuit against Macy’s.
Trending case #2: Lipari-Williams v. Penn National Gaming, Inc.

Also in November 2021, a federal district court in Missouri certified a class action of 1500 casino workers who alleged, similar to the Macy’s case, that their employer violated ERISA with its tobacco surcharge.

Specifically, the employer, a casino, imposed a $50/month tobacco surcharge on health insurance on employees who used tobacco. The employer determined tobacco use status through an affidavit completed by each employee covered under the employer group health plan.

The plaintiffs in this case allege that the employer failed to notify employees of a reasonable alternative standard. Instead, the employer gave employees only two options:

1) don’t use tobacco and avoid the surcharge; or

2) use tobacco and be subject to the surcharge. In other words, according to the plaintiffs, the employer did not give them a reasonable alternative standard, like a tobacco cessation program, to avoid the $50/month surcharge.

In addition, the complaint alleges that even when the employer offered a reasonable alternative standard (i.e., a smoking cessation program), the employer did not provide employees the full reward once they completed the program.

Instead, the notice materials stated employees would only avoid the tobacco surcharge on a prospective basis. The plaintiffs state that the law requires the full reward be available upon completion of the reasonable alternative standard, which means the plaintiffs would be entitled to a refund of the $50/month penalty that they had already paid during that plan year.

The plaintiffs are seeking a refund of all the tobacco surcharges collected by the employer since 2016. Like the Macy’s case, this case is still pending.

What should workplace wellness programs do now?

Even though we won’t know the final outcomes of either case described above for a while, we can still draw lessons from these cases.

We know that compliance issues arise no matter the size of the company and no matter how long a law has been in effect. The ERISA wellness incentive laws have been in effect in their current form since 2013, which is a long time to get into compliance.

The lawsuits also teach us that wellness programs must not only offer a reasonable alternative standard but must make sure that anyone who completes that reasonable alternative standard qualifies for the entire reward for that plan year.

Providing adequate notice about the reasonable alternative standard is also mandatory. Now is a good time to review whether your wellness program is compliant with ERISA and other wellness program laws, including HIPAA, ADA, and GINA.

For more information about legal considerations with tobacco surcharges, please connect with me at Center for Health and Wellness Law, LLC.

**Please Note: Nothing contained in this blog post is to be construed as legal advice. This blog post is for informational and educational purposes only. Readers are encouraged to seek legal counsel for any advice or compliance determinations needed on specific situations.**

Barbara L. Zabawa, JD, MPH
Barbara L. Zabawa, JD, MPH

Founder and President, Center for Health and Wellness Law, LLC

Barbara J. Zabawa is the founder and president of the Center for Health and Wellness Law, LLC, a law firm dedicated to improving legal access and compliance for the health and wellness industries. She is also lead author of the book, “Rule the Rules on Workplace Wellness Programs,” published by the American Bar Association. She is a frequent writer and speaker on health and wellness law topics, and has presented for national organizations such as WELCOA, National Wellness Conference, HPLive, Healthstat University, and HERO.

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