04/02/2025

What Employer Health and Welfare Plan Sponsors Should Know: Tobacco Surcharges and Legal Risk

Employer plan sponsors that impose tobacco use surcharges on participants enrolled in group health plans should take immediate notice of recent litigation and enforcement trends targeting wellness program compliance under the Affordable Care Act (ACA), HIPAA, ERISA, and related regulations.

Tobacco surcharges are generally permissible under the ACA’s wellness program rules, provided they meet specific nondiscrimination requirements. However, lawsuits and regulatory scrutiny have recently increased around employer-sponsored health plans that fail to offer a “reasonable alternative standard” (RAS) for participants who do not meet the health standard (i.e., being tobacco-free).

Key legal requirements under HIPAA and the ACA for outcome-based wellness programs include:

• A surcharge may not exceed 50% of the cost of employee coverage.
• If a participant does not meet the standard (e.g., tobacco-free), the plan must offer a reasonable alternative standard or allow a waiver.
• Notice of the availability of the RAS must be provided in all plan materials describing the program.

Legal Exposure and Current Litigation

Several recent class-action lawsuits have alleged violations of these wellness program rules. Plaintiffs argue that:

• They were not informed of an available RAS to avoid the surcharge (e.g., completing a smoking cessation program).
• The surcharge was applied automatically without providing an opportunity to meet a reasonable alternative.
• These failures resulted in discriminatory treatment under ERISA and the ACA, and in some cases, violations of the ADA if the program required medical disclosure without proper safeguards.

Courts are increasingly scrutinizing employer practices that fail to comply with the notice and accommodation obligations, potentially exposing plan sponsors to significant liability, including penalties, required plan corrections, and participant restitution.

Action Items for Plan Sponsors

1. Review Plan Design: Ensure your wellness program and any tobacco surcharges comply with ACA/HIPAA wellness regulations.
2. Confirm Reasonable Alternatives: Offer meaningful alternatives (e.g., completion of a cessation program) to participants who use tobacco.
3. Update Notices: Verify that all wellness program materials clearly inform participants of the availability of a reasonable alternative standard.
4. Train Benefits Teams and Vendors: Ensure internal teams and third-party administrators are educated on compliance requirements.
5. Audit Past Practices: Identify any past failures to offer RAS or provide notice and consider voluntary correction or legal consultation.

Need Help?
For questions regarding wellness program compliance or to conduct a risk assessment of your plan’s tobacco surcharge structure, please reach out to a member of the McGrath North Employee Benefits Practice Group today.