By Erin Powell, RHU® | Seubert Compliance Officer
Highlights:
- The Departments have issued FAQs addressing compliance issues that have been the focus of recent lawsuits regarding tobacco surcharges.
- In general, the lawsuits allege that the surcharges violate federal law because employees were not notified about a reasonable alternative standard to avoid the surcharge and the full reward was not provided for completing the alternative standard midway through the year.
- The FAQs state that the Departments will not take enforcement action merely because it does not retroactively provide a reward (or refund surcharges) for the portion of the year before an individual completes the reasonable alternative standard.
- The FAQs also address the requirement to notify employees of the reasonable alternative standard.
On Aug. 26, 2026, the U.S. Departments of Labor, Health and Human Services, and the Treasury (Departments) released FAQs addressing topics that have been the focus of numerous class-action lawsuits challenging health plan surcharges for tobacco users. The FAQs:
- Provide that the Departments will not take enforcement action against a wellness program just because it provides a reward corresponding to the period after the reasonable alternative standard is satisfied (but not retroactively to the beginning of the plan year) for individuals who qualify for the reward partway through the year; and
- Address the requirement to notify employees about the existence of a reasonable alternative standard for qualifying for a wellness program reward (or avoiding a surcharge).
While the FAQs provide guidance on the Departments’ position for their own enforcement actions, they do not directly impact any private litigation regarding wellness programs, including the tobacco surcharge lawsuits. Courts may refer to this guidance when determining if a specific wellness program has violated federal law. However, due to the U.S. Supreme Court’s 2024 ruling in Loper Bright Enterprises v. Raimondo, courts exercise more independent judgment and give less deference or weight to the interpretations of federal agencies.
Tobacco Surcharge Litigation
Over the past several years, numerous class-action lawsuits have been filed against employers alleging that health plan premium surcharges related to tobacco use violate federal requirements for workplace wellness programs. These lawsuits have been filed by current and former employees of major U.S. companies who have paid more in premiums due to their tobacco use. In general, the lawsuits assert that the wellness programs violated federal law by:
- Not properly offering or disclosing a reasonable alternative standard to avoid the tobacco surcharge, including failing to provide a specific notice about physician-approved alternatives to earn the reward; and
- Not providing the full reward to participants who complete the reasonable alternative standard midyear by only applying the premium reduction on a prospective basis (instead of reimbursing participants for surcharges paid for the entire year).
The lawsuits request various forms of relief, including reimbursing employees who paid the surcharges with interest, disgorging any benefits or profits, and paying all attorney fees and costs. Although some courts have allowed tobacco surcharge lawsuits to proceed, the growing trend has been for employer-favorable rulings that dismiss plaintiffs’ claims.
Federal Requirements for Wellness Programs
Wellness programs that impose a health plan premium surcharge (or provide a reward) based on a health-related standard (e.g., using tobacco) must adhere to the following five standards for health-contingent wellness programs:
- Frequency: Eligible individuals must have an opportunity to qualify for the reward at least once per year;
- Size of reward: The total reward offered to an individual cannot exceed 30% of the total cost of employee-only coverage under the plan. However, for wellness programs that are designed to prevent or reduce tobacco use, the total reward cannot exceed 50% of the total cost of coverage under the plan;
- Availability of full reward (reasonable alternative standard): The full reward under the program must be available to all similarly situated individuals. To satisfy this requirement, the program must provide a reasonable alternative standard (or waiver of the otherwise applicable standard) to qualify for the full reward for anyone who does not meet the initial standard;
- Reasonable design: The program must be reasonably designed to promote health or prevent disease; and
- Employee notice: The availability of a reasonable alternative standard must be disclosed in all plan materials describing the terms of the wellness program. However, if plan materials merely mention that such a program is available, without describing its terms, this disclosure is not required.
FAQ Guidance
The FAQs refer to the Departments’ 2013 final rules on workplace wellness programs and focus on two requirements that have been at issue in the tobacco surcharge litigation: availability of the full reward and the employee notice.
Availability of the Full Reward
The FAQs address the question of whether an individual who satisfies a reasonable alternative standard partway through the plan year must be provided the reward retroactive to the beginning of the plan year or, alternatively, from the time they satisfy the reasonable alternative standard required for the reward. In answering this question, the Departments acknowledge that the preamble to the 2013 final rules includes statements indicating that retroactive payments are required. However, the regulatory text of the 2013 final rules does not clearly require retroactive payments of the reward. The new FAQ guidance states that, until further guidance or rules are issued, the Departments will not take enforcement action against wellness programs that provide a reward corresponding to the period after the reasonable alternative standard is satisfied (but not retroactively to the beginning of the plan year) and otherwise satisfy applicable nondiscrimination requirements.
The FAQs also note that, for health-contingent wellness programs, all the facts and circumstances must also be considered in determining whether a reasonable alternative standard has been provided. Under the Departments’ enforcement discretion, the wellness program must still provide sufficient time for individuals to complete the alternative standard and receive a reward under the program.
Employee Notice
A health-contingent wellness program must disclose the availability of a reasonable alternative standard to qualify for the reward (and, if applicable, the possibility of waiver of the otherwise applicable standard) in all plan materials describing the program. The FAQs reiterate that this notice must be included in all plan materials describing the terms of the wellness program and, for outcome -based wellness programs, in any disclosure that an individual did not satisfy an initial outcome-based standard. The notice must contain contact information for obtaining a reasonable alternative standard and a statement that recommendations of an individual’s personal physician will be accommodated.
The FAQs also reiterate that if plan materials merely mention that such a program is available, without describing its terms, this disclosure is not required. For example, a Summary of Benefits and Coverage that notes that cost sharing may vary based on participation in an outcome-based wellness program, without describing the standards of the program, would not trigger this disclosure.
Need Help Staying Compliant?
Seubert’s Employee Benefits team monitors evolving compliance requirements to help employers stay ahead of regulatory changes and minimize risk. Contact us at 412-734-4900 or [email protected] your Seubert representative for guidance on how these updates impact your organization.
Erin is the Compliance Officer in Seubert’s Employee Benefits Department. She joined Seubert in 2008 and has more than 16 years of experience in the employee benefits and compliance industry. In her current role, Erin is responsible for ensuring awareness of new developments and/or changes in the various federal and state laws that may impact a business’ employee benefits program.
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