A “tobacco surcharge” is part of many employers’ wellness programs, where the employer charges tobacco users higher health insurance premiums than non-tobacco users. A typical tobacco surcharge program will ask an employee if they are tobacco-free and will impose the surcharge on tobacco users unless the tobacco user completes a smoking cessation program.
Among a slew of recent class action litigation involving employers’ tobacco surcharge programs, the outdoor retailer Bass Pro Shops recently agreed to a $4.95M settlement for a lawsuit filed last spring alleging that the surcharge Bass Pro Shops required tobacco users to pay for their health insurance was unlawful. This settlement should prompt employers who have a tobacco surcharge program to review their program to make sure it’s compliant.
Tobacco Surcharge Program Requirements
With limited exceptions, HIPAA prohibits an employer’s health plan from discriminating against participants based on a health status factor, such as charging an employee a higher premium due to the employee’s health condition. One such exception is a wellness program that is part of an employer’s health plan that meets certain requirements. Because tobacco use is considered a health status factor, an employer’s tobacco surcharge program must meet the following conditions to comply with HIPAA:
- Surcharge Amount. The tobacco surcharge cannot be more than 50% of the cost of coverage. The cost of coverage is the total employer and employee premiums for the benefit package under which the employee is enrolled.
- Reasonable Alternative Standard. The employer must provide a reasonable alternative standard to avoid the surcharge, such as completing virtual smoking cessation classes within a certain period of time. All facts and circumstances are considered in determining whether the employer offered a reasonable alternative standard.
- Frequency of Avoiding Surcharge. An employer must provide employees a reasonable opportunity to avoid the tobacco surcharge at least once a year, such as during initial enrollment or each annual open enrollment. The full award must be available to those employees who are tobacco-free along with those who are tobacco users but have completed the reasonable alternative standard when it’s annually offered.
- Notice of Availability. All plan materials describing the terms of the tobacco surcharge must also describe the availability of the reasonable alternative standard, along with who to contact for more information about the reasonable alternative standard. The notice must also include a statement that recommendations of the individual’s physician will be accommodated.
Allegations Against Bass Pro Shops’ Tobacco Surcharge Program
To avoid paying an additional $40 per week toward health insurance premiums, Bass Pro Shops required employees who are tobacco users to complete a smoking cessation program and then stay tobacco-free for 90 days. The class action lawsuit against Bass Pro Shops’ tobacco surcharge program alleges that the tobacco surcharge program is unlawful in the following ways:
- Bass Pro Shops did not offer a reasonable alternative standard for tobacco users to meet. A tobacco user could only avoid the surcharge if the employee ceased using tobacco products and then stayed tobacco-free for 90 days. As such, the complaint alleges that Bass Pro Shops did not provide any alternative standard to its participants; instead, it required participants to meet the original standard – not being a tobacco user.
- Bass Pro Shops’ tobacco cessation program did not allow employees to earn the program’s full reward – i.e., avoiding the surcharge for the entire plan year upon completion of the alternative standard – because the surcharge was removed only on a going-forward basis.
- Bass Pro Shops did not provide notice that an alternative program existed in every communication regarding the surcharge. It also failed to include a statement that recommendations from an individual’s personal physician in formulating a reasonable alternative standard will be accommodated.
Other class action lawsuits against Walmart, Target, Macy's, 7-Eleven and others have alleged similar deficiencies in those companies’ tobacco surcharge programs.
It’s worth noting that, by settling the class action lawsuit, Bass Pro Shops is not necessarily admitting that its tobacco surcharge program was unlawful or that the facts the class action lawsuit alleged were all true. Nonetheless, it still cost Bass Pro Shops millions of dollars to settle, and that’s not including any other costs it incurred to defend the lawsuit from the onset.
Employer Action Items
Employers should take this new wave of class action litigation seriously and evaluate their own tobacco surcharge programs:
- What is the amount of the surcharge?
- What must tobacco users do to avoid the surcharge, and by when?
- What happens when tobacco users complete the reasonable alternative standard?
- How is the tobacco surcharge, and requirements to avoid it, communicated to employees?
Properly administered tobacco surcharge programs are much less likely to be targeted.
Note from the Author
Tobacco surcharge programs that require employees to take a medical exam, such as a blood test for nicotine, must also meet the Americans with Disabilities Act (ADA) requirements. ADA requirements are outside the scope of this eAlert.
