Smoke ‘Em One By One … Navigating the Wave of Tobacco Surcharge Lawsuits

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by Alex Smith

Over the past several months, numerous large employers and their health plan fiduciaries have faced lawsuits regarding their health plan’s tobacco surcharge. A tobacco surcharge wellness program typically charges a higher monthly premium to employees and covered dependents who smoke or otherwise use tobacco products to account for some of the higher medical costs associated with tobacco use. Tobacco users can typically avoid the surcharge by completing a smoking cessation program, regardless of whether they actually quit.

This wave of putative class action lawsuits began earlier this year even though employer health plan tobacco surcharges have been around for years and the HIPAA regulations permitting the surcharges were last updated in 2013. Since then, numerous lawsuits challenging employer health plan tobacco surcharge programs have been filed. Courts have yet to rule on the recently filed lawsuits, with the plaintiffs voluntarily dismissing one of the lawsuits prior to the court ruling on the employer’s motion to dismiss.

These lawsuits typically allege that the employer and its health plan fiduciaries breached their fiduciary duties under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), by impermissibly discriminating against tobacco users by charging higher premiums because of some combination of the following:

  • the wellness program does not provide a compliant reasonable alternative standard because the individual must become tobacco free,
  • a participant who completes the smoking cessation program (or other) alternative is not able to avoid the full amount of the surcharge for the plan year, and/or
  • a reasonable alternative standard, such as a smoking cessation program, was not disclosed to participants.

In light of this wave of lawsuits, employers that have or are considering adding a tobacco surcharge wellness program may want to consider the following to minimize the chances of being subject to one of these lawsuits:

  • Work with legal counsel to confirm that the tobacco surcharge wellness program is consistent with the requirements of the HIPAA wellness program regulations, including that:
    • individuals are merely required to complete the smoking cessation program (or other reasonable alternative) rather than becoming tobacco free;
    • individuals who complete the reasonable alternative are eligible to avoid the full surcharge for the plan year; and
    • the tobacco surcharge does not exceed the maximum amount permitted by the HIPAA wellness program regulations.
  • Review open enrollment and other wellness program materials to confirm that details regarding the tobacco surcharge wellness program, including how to satisfy the reasonable alternative and avoid the penalty, are clearly disclosed to employees, and consider updating the materials if necessary to ensure sufficient disclosure.
  • Evaluate the effectiveness of the tobacco surcharge wellness program to see whether it has historically achieved the desired results and had the intended effect on participant behavior.