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Watch out for tobacco surcharges

Updated: May 18, 2023

Wellness programs are a popular method used to control claims costs, but many don’t realize that these programs are highly regulated. One issue that often gets overlooked is the ever-popular tobacco surcharge. A tobacco cessation program is actually considered an outcomes-based wellness program under HIPAA because an individual has to attain a specific health outcome in order to get a specific reward (for example, I have to be tobacco-free to get a lower premium or money into my HSA or HRA). Under HIPAA, this type of program has to meet 5 requirements:

  1. The program must be designed to prevent disease and can’t be overly burdensome,

  2. must give an individual the chance to qualify at least once per year,

  3. must give back the full reward back to the beginning of the plan year once the standard is met,

  4. must provide a reasonable alternative standard and must describe terms of wellness program and the availability of a reasonable alternative standard to qualify for the reward. In the case of tobacco cessation, the employer must describe an alternative way for an employee to receive the reward other than not using tobacco, and

  5. The amount of the reward can’t exceed 50% of the total cost of self-only coverage for a program designed to reduce the use of tobacco.

For example, let’s say the total annual premium for employee-only coverage is $350*12 = $4,200. The plan offers employees a wellness program designed to prevent the use of tobacco. The reward for compliance is an annual HRA contribution of up to $400. Since $400 is less than 50% of the total cost of employee-only coverage ($4,200 × 50% = $2,100), the reward is under the HIPAA percentage threshold. However, if the employer imposes a screening or other medical exam that tests for the presence of nicotine, then the incentive would likely be limited to 30% of the cost of coverage under the EEOC’s rules, rather than 50%.  But if the tobacco-cessation program simply asks employees whether they used tobacco without requiring them to take a medical test (e.g., a signed affidavit), the EEOC’s rules wouldn’t apply, and they could give up to 50%. Keep in mind, though, that the employee must have the entire plan year to complete the standard or the reasonable alternative standard. Then, once they complete it, they are entitled to the entire reward for the whole year. Also, the reasonable alternative must be identified and paid for by the employer. Also, to be clear, employees aren’t actually required to quit smoking/using tobacco but, instead, are asked to participate in smoking cessation programs as the alternative standard. As an example of a compliant wellness program-  a group health plan provides a premium surcharge for participants who use tobacco. Participants can avoid the surcharge by participating in a smoking-cessation program (regardless of whether they actually stop using tobacco). The smoking-cessation program is disclosed in plan materials, and the employer pays the cost of participating in the program. The premium surcharge is part of an outcome-based program under HIPAA. The plan complies because the smoking-cessation program is a reasonable alternative standard. Again, note that the smoking-cessation program alternative is made available without the participant having to demonstrate that it would be unreasonably difficult due to a medical condition, or medically inadvisable, to stop tobacco use (see Example 6; DOL Reg. §2590.702(f)(4)) Finally, there are a handful of states that have smoker protection laws, which generally falls under state employment law and outside of state insurance law. Many states say that it is unlawful for an employer to discriminate against an individual with respect to discharge, compensation, promotion, any personnel action or other condition, or privilege of employment because the individual is a smoker or nonsmoker. So, it seems that health plan benefits could be included as a “privilege of employment”, thereby making a non-tobacco incentive unlawful in that particular state. Thus, an employer should look closely at state law (even if self-insured) to see if a smoker protection would prevent a tobacco surcharge. 

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