Several new lawsuits have been filed recently alleging that employers violated HIPAA’s non-discrimination rule by charging higher health insurance premiums to employees who use tobacco products. As we have discussed in previous blogs, many employers include a “tobacco surcharge” in their plans, which typically asks employees to confirm whether they use tobacco products. If an employee does use these products, a surcharge is usually applied unless the employee participates in a tobacco cessation program.
In a recently filed lawsuit, participants have alleged that retailer Nordstrom, Inc’s $40-per-month penalty charged to tobacco-using workers on the health plan violates non-discrimination rules because it was not properly advertised to employees and did not offer an option for retroactively reimbursing penalties that have already been paid.
Under HIPAA’s non-discrimination provisions, group health plans are prohibited from charging individuals different premiums or imposing different costs based on health status-related factors. While this prohibition is broad, the HIPAA nondiscrimination rules do include an exception that allows group health plans to establish different premiums and cost-sharing amounts if individuals adhere to programs of health promotion or disease prevention, typically referred to as wellness programs.
In order to satisfy the wellness program exception, a tobacco surcharge must be implemented as part of an employer's health plan, and employees must have a reasonable opportunity to avoid the surcharge or opt into a reasonable alternative at least once per year. A reasonable alternative is a way to earn the reward (i.e., the lower rate). A reasonable alternative is often a smoking cessation program, but other alternatives could be made available as well.
If an employee completes the reasonable alternative, the lower premium must be given to that employee even if the employee keeps smoking. When an individual has satisfied the reasonable alternative, the plan is required to credit or refund any surcharges retroactively. While the plan does have flexibility to determine the timing of the reward payment, plan sponsors must exercise caution to ensure that all participants who qualify for the reward during the plan year actually receive the benefit. If a plan sponsor chooses to apply a retroactive payment at the end of the plan year for all previous months, failure to make these payments may result in non-compliance with the non-discrimination rules.
If the employee fails to complete the necessary requirements or opt into a reasonable alternative, the surcharge imposed cannot be more than 50% of the cost coverage for the benefit package under which the employee is enrolled (combined with any other wellness rewards or penalties that may be available). To properly alert employees of these requirements and the availability of a reasonable alternative, the surcharge must be disclosed in the summary plan description (SPD) and plan documents as well as any benefit guides or open enrollment materials that describe the wellness program.
If you are testing for tobacco, you also have to consider the Equal Employment Opportunity Commission (EEOC) rules on voluntary wellness programs. When the EEOC rules apply, there are additional notice requirements, and it would likely not be reasonable to charge a 50% penalty. The EEOC had proposed regulations outlining what was a reasonable penalty, but those were struck down by a court and the EEOC has not yet issued new guidance. If you do not test for nicotine, but only ask about nicotine use, the EEOC rules are not applicable.
Implementing a tobacco surcharge can be an effective way to promote the health of your employees and drive down costs. However, it is important that you design it in a way that does not subject your company to penalties. Failure to comply with these rules can result in major penalties from the Department of Labor or through court settlements.
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