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Article | Insider

Since you asked: Is a tobacco surcharge a ‘wellness program’?

By Maureen Gammon , Anu Gogna and Kathleen Rosenow | November 10, 2023

Employers considering giving health plan premium discounts or imposing premium penalties for employee tobacco use must comply with HIPAA/Affordable Care Act wellness rules.
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We are considering imposing a premium surcharge on employees participating in our employer-sponsored group health plan who use tobacco products (i.e., a tobacco surcharge). Do federal wellness rules apply?


Yes. Tobacco use is a health status factor that is protected by the Health Insurance Portability and Accountability Act (HIPAA)/Affordable Care Act (ACA) rules on nondiscrimination in health status. So, any financial incentives (whether rewards or penalties) related to tobacco use must comply with the wellness program requirements. The U.S. Equal Employment Opportunity Commission (EEOC) wellness rules also may apply if the tobacco surcharge program uses medical testing to screen for tobacco or nicotine. The tobacco surcharge also affects affordability calculations under the ACA’s employer shared responsibility mandate.

HIPAA/ACA wellness rules

The HIPAA/ACA wellness rules generally prohibit a group health plan from discriminating between individuals based on their health status. This means, among other things, that group health plans usually cannot charge individuals different premiums or impose different deductibles or copays based on a specific health factor (such as smoker status).

However, the HIPAA/ACA rules do not necessarily prevent employers from giving premium discounts or imposing premium penalties based on participation in programs intended to promote health and prevent disease. 

Wellness programs that offer a health plan reward if a participant meets a standard related to a health factor — health-contingent wellness programs (activity-only and outcome-based) — must meet the following five requirements:

  1. Frequency of opportunity to qualify. Individuals must have the opportunity to qualify for the full reward at least once a year.
  2. Size of the reward. The total amount of the reward cannot exceed 30% of the total cost of coverage for programs that do not include a tobacco-related incentive/surcharge or 50% of the total cost of coverage for programs that have a tobacco related incentive/surcharge. The “total cost of coverage” is determined based on the total amount of employer and employee contributions toward the cost of coverage for the benefit package under which the employee is enrolled (or the employee and any dependents, if incentives are offered to dependents).
  3. Reasonable design. The program must be designed to promote health and must not act as a subterfuge for underwriting or reducing benefits. In addition, all individuals must be provided with a reasonable alternative to qualify for the incentive, if requested.
  4. Uniform availability and reasonable alternative standard (RAS). The wellness program may not require a participant to verify that he or she is meeting the program requirements in a way that is unreasonably difficult due to a medical condition or medically inadvisable. In addition, employees or covered dependents must be provided with a RAS (or a waiver of the applicable standard) upon request, regardless of any medical condition or other health factor. If the RAS is another outcome-based wellness program, the RAS cannot be a different level of the same standard without additional time to comply. The individual must be given the opportunity to comply with physician recommendations as a second alternative, but only if the physician joins in the request for the RAS.

    Note: The full reward must be provided if the RAS is completed, even if the individual’s health outcome did not improve (e.g., even if the individual did not actually stop smoking). The wellness program must provide the “same full reward” to individuals who meet an RAS that they would have received if they had met the initial standard, so that employers may be required to pay a reward or reimburse a surcharge retroactively.

  5. Notice of availability of RAS. This notice must be included in all materials describing the terms of a wellness program and must include contact information for obtaining the RAS and a statement that recommendations of an individual’s personal physician will be accommodated. For health-contingent outcome-based wellness programs, this notice must also be included in any disclosure that an individual did not satisfy an initial outcome-based standard.

A wellness program that penalizes (i.e., imposes a surcharge) plan participants for using tobacco (or provides a reward for those who do not) is a health-contingent outcome-based wellness program under the HIPAA/ACA wellness rules. As such, the plan must provide a RAS to plan participants and notify them of its availability, thus enabling tobacco users to avoid the penalty/surcharge even if they are not tobacco free.

Common types of RASs include smoking cessation and nicotine counseling programs where an individual avoids the penalty/surcharge by completing the program (even if the individual does not actually quit smoking).

Compliance with the HIPAA/ACA wellness rules has been the focus of several Department of Labor (DOL) investigations and lawsuits. A common theme in these lawsuits involves an employer’s failure to comply with the RAS requirement. In a recent lawsuit, the DOL determined that the employer violated the rules by not informing plan participants that a RAS existed that would allow them to avoid paying a tobacco surcharge.

In other lawsuits, employers were found to be in violation of the HIPAA/ACA wellness rules by:

  • Not providing a way for employees in the tobacco cessation program to avoid the plan’s smoking surcharge retroactively, as required if the employee completes the RAS (the HIPAA/ACA wellness rules generally require that the “full reward” be provided once the RAS has been satisfied)
  • Requiring participants in the employer’s wellness program who entered the employer’s tobacco cessation program to still pay the tobacco surcharge unless they confirmed that they had quit smoking for some period of time (e.g., six months)

EEOC wellness rules

The EEOC’s wellness rules under the Americans with Disabilities Act (ADA) limit disability-related inquiries and medical examinations related to wellness programs. If a tobacco use program simply asks employees whether they use tobacco, the EEOC’s ADA wellness rules would not apply; however, these rules would be triggered if the program uses medical testing (e.g., saliva or blood samples) to verify nicotine or tobacco use. The EEOC’s Genetic Information Nondiscrimination Act (GINA) wellness rules do not apply to tobacco-related wellness incentives.

ACA shared responsibility

Under the ACA employer shared responsibility mandate, applicable large employers must offer minimum essential coverage to their employees (and dependent children) that is affordable and provides minimum value. Affordability is based on the employee’s required contribution for single coverage under the lowest cost group health plan option offered by the employer. Under the final employer mandate regulations, nondiscriminatory wellness program incentives that reduce the amount employees must pay for employer-sponsored coverage are not factored into determining whether the coverage is affordable, unless the incentive is related to tobacco use.

Thus, the affordability of a plan that charges a higher initial premium for tobacco users is determined based on the premium that is charged to non-tobacco users, or tobacco users who complete the RAS, such as attending smoking-cessation classes — regardless of whether an employee actually qualifies for the incentive. Conversely, wellness incentives unrelated to tobacco use (for example, for completing biometric testing or participating in an exercise program) are treated as not reducing an employee’s required contribution even if the employee actually received the incentive.


  • Employers should ensure their tobacco surcharge programs comply with the HIPAA/ACA wellness rules. This includes providing a RAS, notifying participants of the availability of the RAS, and giving the full reward regardless of whether an individual meets the initial standard (being a non-smoker) or the RAS.
  • If the employer tests participants for the presence of nicotine, employers must comply with the EEOC’s ADA wellness rules.
  • Employers should confirm that for purposes of the affordability determination under the ACA’s employer mandate, they are calculating the employee’s required contribution by treating as earned the wellness program’s premium incentives related exclusively to tobacco use.

Senior Regulatory Advisor, Health and Benefits

Senior Regulatory Advisor, Health and Benefits

Senior Regulatory Advisor, Health and Benefits

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