Courts Ablaze with Tobacco Surcharge Class Action Lawsuits

Tobacco surcharges, or an increase in premiums for employees who use tobacco products, are attractive to employers looking to keep their employee population healthy and lower their healthcare costs. But they can go too far, and many employers might not be aware of the limitations. 

Over the past few months, there has been a large increase in the number of class action lawsuits filed against large employers for improperly implementing tobacco surcharges in their wellness programs. These include large, national employers such as Walmart, Tractor Supply Co. and Target. Each of these lawsuits vary somewhat in the specific claims that they are bringing, but in general, the plaintiffs are alleging that the tobacco surcharges have unreasonable alternative standards to receive the benefit (the removal of the tobacco surcharge), participants are not receiving the benefit for the required plan year if they complete the reasonable alternative standard, or that the amount of the tobacco surcharge is too expensive.  

Tobacco surcharges can be a permissible component of a health-contingent, outcome-based wellness program, but employers need to make sure their wellness programs: 

1. Be reasonably designed to promote health or prevent disease; 
2. Give employees a chance to qualify for the incentive at least once a year; 
3. Cap the reward or penalty at 50% of the total cost of coverage for avoiding tobacco (this is the total cost of coverage, not just the employee portion); 
4. Provide an alternative way, or reasonable alternative standard, to qualify for the incentive; 
5. Describe the reasonable alternative standard of qualifying for the incentive in written program materials. 

If an employee completes the reasonable alternative standard for a tobacco surcharge, they then need to be eligible to receive the entire benefit (the removal of the surcharge) retroactive to the start of the plan year. Additionally, if the employee completes the reasonable alternative standard (usually in the form of completing a tobacco cessation course) then they need to be eligible to receive the entire benefit, meaning that the employer cannot impose an additional requirement that the employee actually quit using tobacco products. If the wellness program meets these requirements, the employer has a bona fide wellness program with a compliant tobacco surcharge, and they are allowed to calculate their ACA affordability (if applicable) without including the amount of the tobacco surcharge in the affordability calculation.  

Employers should be aware of the increase in litigation regarding tobacco surcharges and review their wellness programs with these surcharges to make sure they’re compliant. Regular compliance review should allow employers to snuff out any concerns they have about potential liability regarding these surcharges.