Exploring Health Insurance Tobacco Surcharges

2 minute read

Employers are increasingly using tobacco surcharges on health insurance premiums to manage costs and encourage healthier lifestyles. While these surcharges are allowed under compliant wellness programs, they face criticism for potentially violating federal laws like Employee Retirement Income Security Act (ERISA), Affordable Care Act (ACA), and the Health Insurance Portability and Accountability Act (HIPAA). Recent ERISA class-action lawsuits are challenging these programs, highlighting possible fiduciary breaches.

What is a Tobacco Surcharge?

A tobacco surcharge is an extra fee for employees using tobacco products, designed as a financial incentive to encourage quitting. ACA and HIPAA mandate these surcharges be part of a compliant wellness program, offering a clear path to reduced premiums through a reasonable alternative standard (RAS).

Under the ACA, tobacco users may face up to 50% higher health insurance premiums, but state regulations can vary. Employers should check local laws for compliance. Additionally, HIPAA and the Americans with Disabilities Act (ADA) ensure wellness programs remain voluntary and non-discriminatory.

Employer Considerations

The ACA categorizes wellness programs into two types: participatory, where incentives are earned by simply joining, and health-contingent, which are goal-oriented, like quitting tobacco. Programs with a tobacco surcharge must meet this five-factor test to comply with federal regulations.

1. Annual opportunity - Employees can qualify for a lower premium at least once a year.
2. Incentive limits - Premium differences must not exceed 50% of employee-only coverage costs, with a 30% cap on other health incentives.
3. Reasonable design - Programs should promote health or prevent disease, not penalize participants.
4. RAS - Programs must offer a RAS, like a tobacco cessation program, to avoid surcharges.
5. Clear communication - Employees must be informed about RAS availability.

Employers often face compliance issues with incentives and RAS requirements. Lawsuits claim some wellness programs lack alternatives or clear communication on tobacco surcharges, risking ERISA breaches. Employees may see these surcharges as discriminatory or not health-focused. Employers should review their wellness programs for transparency and accessible alternatives, like smoking cessation, and ensure compliance with ACA, ERISA, and HIPAA.

Some states, like California and New York, ban tobacco surcharges, while others may limit them. Employers should consult local legal counsel for state-specific requirements.

Summary

Employers can implement a tobacco surcharge on health insurance premiums to encourage tobacco cessation as part of a wellness program. It's crucial to navigate federal and state regulations and provide support to ensure program success. Employers should consult local legal counsel before updating health plans. Download the bulletin for more details.