Smoker surcharges: “It’s a trap!”

Have you seen the “It’s a Trap!” public service announcements regarding teen tobacco use? I’m tempted to create a series using the same catch-phrase for employers attempting to reduce tobacco-use in their workforce with a health plan surcharge. Recent litigation by the Department of Labor makes it clear that employers with the surcharge design could get into trouble if they aren’t familiar with the HIPAA/ACA wellness program rules and don’t take the right steps to keep the design compliant.

Many employers are pursuing cutting-edge wellness programs, using a variety of methods to encourage employees to pursue healthier lifestyles. Discouraging tobacco use is certainly a primary goal within many of these programs. One common provision – used by 26% of employers with 500 or more employees, a Mercer survey found -- is a surcharge on the health plan contributions an employee pays if the employee is a tobacco user (or, in the alternative, a reduction in contributions for those employees who are not tobacco users). The median contribution differential is $600, a substantial amount. Generally, the employee self-certifies his or her tobacco user status. Sounds simple, right?

The problem is that nicotine addiction is a health status factor protected by HIPAA, so any financial incentives tied to a group health plan related to smoking must comply with the law’s nondiscrimination provisions. Those provisions require, among other duties, that the plan offer a reasonable alternative standard to those who cannot satisfy the obligations to obtain the reward (or avoid the surcharge). For example, an employee may receive the lower premium if they participate in a smoking-cessation program, even if they fail to quit. Important to note that employers must provide notice of the availability of the reasonable alternative standard.

The DOL litigation noted above provides a valuable lesson as to where employers can go wrong. In that case, plan materials did not properly disclose the availability of the reasonable alternative standard. The specifics of the alternative need not be provided, but any materials describing the wellness plan or the surcharge must state clearly that an alternative is available. Also, completion of the smoking cessation program offered was difficult for medical reasons, calling into question the “reasonableness” of the alternative. Employers need to make sure what is being required is reasonable, and potentially look at other alternatives for certain employees. Finally, the employer did not remove the surcharge for employees who completed the smoking cessation program if they failed to remain tobacco-free for at least six consecutive months during the year. This is a critical error, but one that employers frequently misunderstand. An employee must be able to avoid the surcharge by completing the alternative, even if the employee fails to quit smoking.

While these rules may be frustrating to employers, ignoring them is not worth a lawsuit by the DOL. Best steps for trap avoidance: offer a reasonable alternative and notify employees of its availability.

Wade Symons
by Wade Symons

Leader, Regulatory Resource Group, Mercer

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