Employers Face Lawsuits Over Tobacco Surcharges

Employers sponsoring group health plans are facing increased scrutiny with a recent surge of lawsuits surrounding health plan premiums charged to tobacco users.

The Affordable Care Act (ACA) allows health insurance plans to charge tobacco users up to 50% more in premiums than non-tobacco users. Most employers implement this premium increase (or surcharge) through wellness programs. Employers will offer incentives to health plan participants, such as premium discounts, in exchange for their participation in the program and can levy a surcharge to those who do not comply. The U.S. Department of Labor (DOL) regulations provide that these wellness programs must be “reasonably designed to promote health or prevent disease.” A program will be regarded as reasonably designed if a reasonable alternative standard is provided to a participant who does not meet the initial outcome-based standard (i.e. not smoking). The regulations expressly approve programs that encourage smokers to enroll in smoking cessation programs, regardless of whether the participants stop smoking.      

Plaintiffs in these recent lawsuits allege tobacco surcharges imposed by their employers violate ERISA and fail to meet the reasonable alternative standard. Particularly, plaintiffs allege the reasonable alternative standard is not met because:

• The surcharge is waived only for participants who complete the program (rather than for all participants who simply enroll in the program).
• Participants do not receive the full award once the alternative standard is met. For example, if a participant completes the program in the middle of the plan year, the surcharge is only waived on a prospective basis (rather than both retroactively and prospectively).
• Even if a plan offers a reasonable alternative standard, it is not clearly communicated to participants.

Until recently, employers imposed tobacco surcharges without concern, and challenges to the corresponding programs were rare. However, last fall the DOL investigated a Chicago-based employer and found the company wrongly imposed tobacco surcharges. The agency determined the company violated federal regulations by failing to inform the employees that a reasonable alternative existed that would allow them to avoid paying the surcharge.

Independent from federal regulations, some state laws either prohibit or limit tobacco surcharges. In particular, under Louisiana law, employers are not permitted to discriminate against an individual with respect to discharge, compensation, promotion, any personnel action or condition, or privilege of employment because the employee is a smoker. Imposing a surcharge on an employee who smokes seems to run afoul of state law.

Taking note of the surge of lawsuits and DOL scrutiny, employers should review their health plan documents to evaluate the terms of tobacco surcharges and smoking cessation programs. These evaluations should confirm the documents provide a reasonable alternative standard that meets the regulatory requirements. Employers should also consider evaluating how and with what frequency participants are notified about the availability of the reasonable alternative standard.

Last but not least, employers should determine what impact, if any, state laws may have on their tobacco surcharges and smoking cessation programs.

Please contact Regan M. Canfill or any member of the Phelps Employee Benefits/Executive Compensation team if you have questions or need advice or guidance.