Tobacco Surcharge Lawsuits Are Piling Up. Check Your Wellness Program Now.

If your health plan charges smokers more, read this before your next renewal. Over the last eighteen months, tobacco surcharge cases have become the most common type of ERISA health plan lawsuit in the country, with dozens filed against large employers, and the complaints all make the same argument.

The argument

Under the HIPAA wellness rules, a tobacco surcharge is only allowed if the plan offers a reasonable alternative standard, like a cessation program, and if completing that alternative gets the employee the full reward for the entire plan year. The lawsuits claim employers either did not offer an alternative, did not tell people about it clearly, or did not refund the surcharge retroactively to the start of the year once the employee finished the program. Plaintiffs are asking for every surcharge dollar collected, going back years.

Where the cases stand

Several early cases have been dismissed, and others have been allowed to proceed. The courts have not settled on a single answer, and I would not bet a plan design on which way the appeals go. What I can tell you is that defending one of these suits costs more than fixing the program.

The five-minute audit

Pull your plan documents and your enrollment materials and answer five questions. Does the plan offer a reasonable alternative, such as a cessation program, to anyone subject to the surcharge? Is that alternative described in every place the surcharge is described, including the enrollment screen, using the required notice language? Is the alternative available at any time during the plan year, not just at open enrollment? When someone completes it, do you refund the surcharge back to the first day of the plan year, not just stop charging it going forward? And is the surcharge, combined with any other tobacco-related incentive, within the 50% of total cost of coverage cap?

If you answered no to any of those, you have the same exposure the defendants in these cases have.

What we are recommending

For most of our clients, the surcharge is not generating enough revenue to justify the risk. The typical fix is one of three things: tighten the program so it clearly meets all five tests, convert the surcharge into a non-tobacco discount with the same alternative language, or drop it entirely. None of those is wrong. What is wrong is leaving a 2019 surcharge in place without anyone having looked at it.

This is general guidance and not legal advice, and if you receive a demand letter you should call counsel first. But if you just want to know whether your program would pass the five questions, send me the enrollment language and I will tell you.