- On March 24, 2025
A number of class-action lawsuits have been filed against employers, claiming that premium surcharges for tobacco use violate federal regulations. These suits have been brought by current and former employees of large U.S. companies, including PepsiCo, Walmart, Target, and Whole Foods, who argue that their health plan premiums were higher due to their tobacco use, often by hundreds of dollars annually.
The lawsuits generally argue that the health plans violate HIPAA’s nondiscrimination provisions by:
- Failing to offer a reasonable alternative standard to avoid the surcharge, or only providing a premium reduction prospectively after completing the alternative standard; and
- Not including information about the availability of an alternative standard in all relevant plan materials.
In some cases, the lawsuits also claim that the imposition of the tobacco surcharge violates fiduciary duties under ERISA. Plaintiffs seek various remedies, including refunds for employees who paid the surcharges with interest, the return of any benefits or profits, and coverage of attorney fees and costs.
What Employers Need to Know
Employers can impose tobacco-related surcharges on health plan premiums, provided they meet federal compliance standards, including those set by HIPAA’s nondiscrimination rules. Considering recent litigation, employers implementing such surcharges should carefully review their wellness programs to ensure they align with these legal requirements, which include offering a reasonable alternative standard to qualify for full rewards and providing clear communication about the surcharge in all plan materials.
HIPAA Compliance Requirements
Employers often impose additional health plan premiums on tobacco users, whether they use cigarettes, cigars, e-cigarettes, or smokeless tobacco. To comply with federal regulations, these tobacco surcharges must be part of a wellness program that adheres to HIPAA’s nondiscrimination rules. HIPAA classifies wellness programs into two categories: participatory wellness programs and health-contingent wellness programs. Depending on its design, a tobacco surcharge program would fall under one of these categories.
- Participatory programs eliminate the surcharge for employees who engage in an activity (e.g., attending a smoking cessation class), regardless of whether they quit tobacco use.
- Health-contingent programs remove the surcharge only for employees who meet a health-related standard (e.g., no tobacco use).
Participatory wellness programs generally meet HIPAA’s nondiscrimination requirements, provided they are open to all employees, regardless of health status.
Standards for Health-Contingent Wellness Programs
Health-contingent wellness programs must comply with five key standards under HIPAA:
- Frequency of Opportunity: Employees must be given at least one opportunity per year to qualify for the reward.
- Size of Reward: The total reward cannot exceed 30% of the total cost of coverage under the plan. However, wellness programs aimed at reducing or preventing tobacco use can offer a reward of up to 50% of the total cost of coverage.
- Reasonable Alternative Standard: Health-contingent wellness programs must offer a reasonable alternative standard (or waiver) to help individuals who don’t meet the initial standard (e.g., tobacco users) qualify for the full reward. This could include attending a smoking cessation class.
- Reasonable Design: The wellness program must be reasonably designed to promote health or prevent disease, with a reasonable chance of success. It should not be unduly burdensome or discriminatory or rely on questionable methods.
- Employee Notification: All plan materials must clearly explain the availability of an alternative standard to avoid the surcharge, including details on how to obtain it. If applicable, information about the waiver of the standard must also be included. Notices informing employees that they failed to meet the tobacco-free requirement must include contact information for the alternative standard and accommodate personal physician recommendations.
Enforcement and Penalties
The U.S. Department of Labor (DOL) has long enforced HIPAA’s nondiscrimination provisions for health-contingent wellness programs, often resulting in costly settlements for employers. Notable examples include:
- In 2018, an employer agreed to reimburse employees $145,635 in tobacco surcharges after the DOL found that the employer didn’t offer a reasonable alternative standard to avoid the surcharge. The company also paid a $14,563 penalty for the violation.
- In 2023, another employer reimbursed employees $16,660 for tobacco surcharges after the DOL found that employees weren’t informed about the availability of an alternative standard. Before the settlement, the employer had already reimbursed $79,780 for surcharges. The company also paid a $13,422 penalty for violating HIPAA and other federal regulations.
While class-action lawsuits on this issue are still emerging, they will likely have substantial financial consequences for the employers involved. For example, Bass Pro Shops reached a $4.95 million settlement in a lawsuit claiming its tobacco surcharge violated HIPAA’s reasonable alternative standard rules. Employers should continue to monitor developments in tobacco surcharge litigation to ensure their programs are in compliance.
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