Popeye – Spinach and Smoking: Common Pitfalls with Health and Wellness Plans

Common Pitfalls with Health and Wellness Plans

1. Health Insurance Portability and Accountability Act of 1996 (“HIPAA”)

HIPAA prohibits “group health plans” and insurers from using health factors to discriminate among similarly situated individuals concerning the following:

• Eligibility
• Premiums
• Contributions

These HIPAA nondiscrimination rules have an exception that permits group health plans and health insurance issuers to have different premiums, contributions, and cost-sharing amounts if individuals adhere to a program of health promotion or disease prevention.  These are commonly referred to as wellness programs.

There are two sets of final regulations that have addressed the HIPAA nondiscrimination rules, including the exception for wellness programs.  The DOL, Treasury, and HHS jointly issued the first set of final regulations in 2006 that were effective for plan years beginning on or after July 1, 2007.  Health care reform enacted into statutory law the 2006 regulations for wellness programs without major changes.  These became effective for plan years beginning on or after January 1, 2014.  In June 2013, proposed regulations were replaced by new final regulations, which apply to group health plans on the first day of the first plan year beginning on or after January 1, 2014.

Keep in mind that the Americans with Disabilities Act (“ADA”) also prohibits employers and other entities from discriminating against a qualifying individual based on disability.  ADA considerations should not be overlooked when considering HIPAA nondiscrimination and wellness programs.

1. Wellness Program

The term “wellness program” means a program or activity intended to help employees improve their health and reduce the cost of health care.  Some programs require employees to have healthy behavior, such as eating spinach, to qualify for a reward.  Other programs require employees to avoid certain bad behavior, such as smoking, to qualify for a reward.

Wellness programs that are part of a group health plan are subject to HIPAA rules.  Wellness programs that are not part of a group health plan are not subject to the HIPAA nondiscrimination rules because they do not provide or pay for health or medical benefits.  However, other rules, such as ADA, could still apply to a stand-alone wellness plan.

1. Participatory Programs

A wellness program that does not provide a reward on satisfying a standard related to a health factor is a “participatory wellness program.”  It must be available to all similarly situated individuals.  Here are some examples:

• Diagnostic test with a reward not dependent on the result of the test;
• Program that reimburses an employee for participating;
• Program that provides a reward for attending a no-cost education seminar.

1. Health-Contingent Programs

A health-contingent program requires the participant to satisfy a standard related to a health factor to earn the reward.  It can be either an “activity-only program” (such as walking or exercising) or an “outcome-based program” (such as not using tobacco or walking 10,000 tests)  The must satisfy the following five requirements:

1. Frequency of Reward: at least once per year;
2. Size of Reward: may not exceed 30% except can be 50% for program designed to prevent or reduce tobacco use;
3. Reasonable Design: must be reasonably designed to promote health or prevent disease;
4. Uniform Availability and Reasonable Alternative Standards (“RAS”): described below; and
5. Notice of Availability: must disclose in all materials the availability of a RAS.
6. RAS

All facts and circumstances are considered to determine if a reasonable alternative standard is being provided.  For health-contingent program, the following are considered:

• If the reasonable alternative standard is the completion of an educational program, the plan or issuer must make the program available or assist the employee in finding such a program.
• The time commitment required must be reasonable.
• If the reasonable alternative standard is a diet program, the plan or issuer is not required to pay for the cost of food but must pay any membership or participation fee.
• If an individual’s personal physician states that a plan standard (including, if applicable, the recommendations of the plan’s medical professional) is not medically appropriate for that individual, the plan or issuer must provide a reasonable alternative standard that accommodates the recommendations of the individual’s personal physician with regard to medical appropriateness. If multiple alternatives would meet this requirement, the plan is not necessarily required to select the particular alternative suggested by the individual’s physician, so long as the elected alternative accommodates the physician’s recommendations.

1. Recent Litigation

There has been a great deal of litigation recently regarding the smoking surcharges.  The following is a summary and status of some of these cases:

1. Secretary Of Labor v. Macy’s, Inc., et al., No. 1:17-cv-00541 (S.D. Ohio Aug. 16, 2017): Macy’s established a wellness program that included a tobacco surcharge of $45/month for employees who have used tobacco products within the last consecutive six months or who have dependents who have used tobacco products within that timeframe. Although Macy’s implemented various tobacco cessation programs, employees were still required to pay the tobacco surcharge. The DOL (on behalf of the employees) alleged the program did not properly offer a RAS (or provide notice of a RAS) to avoid the tobacco surcharge in violation or §702 of ERISA and that Macy’s breached its fiduciary duty.

Status: In response to Macy’s motion to dismiss for failure to state a claim, the Court issued an order allowing the DOL to bring certain claims and dismissing those involving the period in which Macy’s provided options for having the penalty waived without quitting smoking. Most recently, Macy’s has filed a motion to dismiss and motion for reconsideration of the order, due to the Supreme Court’s ruling in Loper Bright. Loper Bright, decided in June 2024, overturned the long-standing Chevron doctrine of judicial deference to administrative agencies’ reasonable interpretations of ambiguous statutes. See Loper Bright Enterprises, et al. v. Raimondo, 603 U.S. 369 (2024).

2. Williams v. Target Corp., 0:24-cv-03748 (D. Minn. Sept. 26, 2024): Target established a Welfare Benefit Plan that included a tobacco surcharge ($800/year/person, up to $2,400) for an employee’s (or the employee’s family members or domestic partner) use of tobacco products. If an employee failed to disclose tobacco use status, the program would automatically categorize the employee as a tobacco user. To remove the surcharge prospectively, the employee would have to be (1) tobacco-free for six (6) months; or (2) complete the designated tobacco cessation program. Employees allege the program did not properly offer a ERISA-compliant RAS (or provide notice of a RAS in all plan materials) for all employees to avoid the tobacco surcharge in violation of §702 of ERISA and that Target breached its fiduciary duty.

Status: The Court granted the parties’ motion to stay the litigation pending the outcome of the plaintiff’s administrative appeal under the plan. The administrative appeal is pending.

3. Baker v. 7-Eleven, 2:24-cv-01360 (W.D. Pa. Sept. 26, 2024): 7-Eleven established a Comprehensive Welfare Benefit Plan that included a default tobacco surcharge ($720/year/person) unless the employee opted-out of the tobacco surcharge. 7-Eleven’s wellness program allowed certain tobacco-using participants to complete a “quit-tobacco” program to avoid the surcharge on a retroactive basis if completed within a certain timeframe. If the employee completed the program after the timeframe, it would be entitled to removal of the surcharge on a prospective basis. Employees allege the program did not properly offer a ERISA-compliant RAS (or provide notice of a RAS in all plan materials) for all employees to avoid the surcharge and that 7-Eleven breached its fiduciary duty.

Status: Litigation is stayed pending resolution of 7-Eleven’s motion to transfer venue of the action from Pennsylvania to Texas. 7-Eleven argues for venue transfer because it is headquartered in Texas and the employee benefit plan at issue is administered from Texas.

4. Mehlberg v. Compass Grp. USA, Inc., 2:24-cv-04179 (W.D. Mo. Oct. 9, 2024): Compass Group established an employee benefit plan that required disclosure of tobacco use as an eligibility requirement. The plan implemented a tobacco surcharge ($1,248/year) for employees who indicated tobacco use to maintain coverage. Compass Group offered a tobacco cessation plan, such that tobacco users who quit smoking and remain tobacco-free for ninety (90) days would have their surcharge removed prospectively. Employees allege Compass Group failed to retroactively reimburse the surcharge or provide notice of the RAS as required under §702 of ERISA.

Status: On April 15, 2025, the Court denied Compass Group’s motion to dismiss for lack of standing and for failure to state a claim. Thus, the Court gave Compass Group additional time to respond to the complaint.

5. Roman v. Walgreen Company et al., 1-25-cv-01504 (N.D. Ill. Feb. 12, 2025): Walgreens established a wellness plan that included a tobacco surcharge ($75/year/spouse) for tobacco use. Under the plan, either (i) the designation of non-tobacco status; or (ii) the completion of a tobacco cessation program within ninety (90) days of the plan start date would result in the tobacco surcharge being removed retroactively. Thus, Walgreens denied full reimbursement to any employee that completed the tobacco cessation program after the 90-day cutoff date. Therefore, Employees allege the program failed to retroactively reimburse employees who take longer to complete the RAS in violation of §702 of ERISA.

Status: On April 7, 2025, Walgreens filed a motion to dismiss for lack of standing and failure to state a claim, alleging that the employees have no injuries traceable to the tobacco cessation program (or deficient notice therefor) and that the program complies with ERISA. This motion is pending.

6. Leslie et al. v. Rentokil North America, Inc., 5:25-cv-01423 (E.D. Pa. Mar. 17, 2025): Rentokil established a wellness plan that included a tobacco surcharge ($150/month/family) for tobacco use in order to maintain health insurance. Under the plan, employees are required to quit smoking and then submit to the benefits department notification that no one uses tobacco. Rentokil did not provide any RAS to avoid the tobacco surcharge imposed on employees who cannot verify that they are tobacco-free. Employees allege Rentokil failed to affirmatively provide employees with any ERISA-compliant RAS (or notice of a RAS) to avoid the tobacco surcharge in violation of §702 of ERISA.

Status: The complaint was filed March 17, 2025. The Court granted Rentokil additional time to file its responsive pleading.

7. Simpson, et al. v. IRB Holding Corp. et al., No. 1:25-cv-02058 (N.D. Ga. Apr. 15, 2025): IRB Holding Corp. d/b/a/ Inspire Brands established a wellness plan that required employees pay a nicotine premium (between $7.50-$15/week) to maintain health insurance coverage. Under the plan, employees can have the premium removed upon completion of either (1) a nicotine screening; or (2) a six-week smoking cessation program. The plan explicitly indicated that premiums deducted prior to the RAS would not be refunded. Thus, employees allege Inspire Brands denied retroactive reimbursement to employees who satisfied the RAS and failed to provide the required notice under §702 of ERISA.

Status: The complaint was filed April 15, 2025; therefore, Inspire Brands is still within the appropriate amount of time to file a responsive pleading.

A handful of employers have agreed to class-wide settlements ranging from 35-62% of the value of the tobacco premium surcharges collected by the employers over a multi-year time period. For example, participants in the Bass Pro Group LLC alleged Bass Pro Group LLC implemented a wellness program that discriminated against employees who used tobacco without providing a RAS. Bass Pro Group LLC agreed pay a $4.95 million settlement for the tobacco surcharge deductions made between April 2018 to October 2024. Ruiz v. Bass Pro Group LLC, et al., No. 6:24-cv-03122 (W.D. Mo. Apr. 26, 2024). Another employer, UGN Inc., agreed to pay a $299,000 settlement for its alleged failure to provide a RAS and to provide the required notice regarding the availability of a RAS. Smith, et al. v. UGN Inc., No. 1:24-cv-7908 (N.D. Ill. Aug. 30, 2024).