Over the past two and a half years, nearly 60 lawsuits have been filed alleging that employer-sponsored group health plan tobacco surcharge programs violate the HIPAA and Affordable Care Act (ACA) wellness program requirements, as well as ERISA’s fiduciary standards. While the outcomes of these cases have varied, the HIPAA/ACA wellness regulations remain in effect and should be complied with for an employer-sponsored group health plan that imposes a tobacco surcharge.
Lawsuit allegations
As class action lawsuits continue to be filed, there does not appear to be a clear consensus in the courts on how to apply the HIPAA/ACA wellness program requirements. Some of the cases have been dismissed (wholly or partially) or ruled on by a federal court (so far only in federal district courts, but one case has been appealed to the federal First Circuit Court of Appeals). Other cases have reached an out-of-court settlement.
In general, the lawsuits allege:
- The tobacco surcharge program does not provide a reasonable alternative standard (RAS)
- Employees subject to the surcharge are not given access to the “full reward” upon completion of the RAS (at least once per year)
- The program does not provide adequate notification of the RAS
Some of the complaints also allege that imposition of the tobacco surcharge is a breach of an employer’s fiduciary duty under ERISA.
Some of the complaints also allege that imposition of the tobacco surcharge is a breach of an employer’s fiduciary duty under ERISA.
The HIPAA/ACA wellness program rules require, among other things, that the full reward available in a wellness program be available to all similarly situated individuals. For outcome-based wellness programs, the plan must offer a RAS (or a waiver of the health standard) to obtain the reward regardless of whether it is unreasonably difficult due to a medical condition or medically inadvisable for an individual to attempt to satisfy the initial health standard. With regard to a tobacco surcharge program, the RAS could be the offering of a tobacco cessation program, or in certain circumstances it could be complying with a recommendation from the individual’s personal physician.
For more information on compliance, see Is a tobacco surcharge a ‘wellness program’? and What steps can employers take to address litigation surrounding tobacco surcharge programs?
Meaning of the term ‘full reward’
One of the main issues in these lawsuits is whether a RAS has been offered and whether the full reward has been made available to the participant at least once a year. Based on the rulings to date, the courts are interpreting the meaning of full reward in at least two ways:
- The tobacco surcharge must be retroactively removed once the participant completes a RAS. This interpretation bases the full reward on the full period of coverage for which the surcharge has been paid. For example, the employer reimburses the employee for the surcharges paid retroactively to the beginning of the coverage period once the employee completes a smoking cessation program (the RAS). Note that the retroactive reimbursement of the full reward is consistent with the interpretation of the regulatory agencies
- The tobacco surcharge may be prospectively removed once the participant completes the RAS. This is a more individualized approach to the full reward issue. For example, in a calendar-year program, if an employee completes a tobacco cessation program (the RAS) on March 31, the surcharge would be removed beginning April 1; however, there would be no retroactive reimbursement for the surcharge paid from January to March, because the full reward for being tobacco free starts after the RAS is completed
Disposition of recent lawsuits regarding the ‘full reward’ issue
Below are examples of how federal district courts have responded to these tobacco surcharge lawsuits so far.
Denial of motion to dismiss
Some federal district courts have deferred to the retroactive reimbursement interpretation of full reward used by the regulatory agencies. Others have not deferred to the agencies’ interpretation but still found that if non-tobacco users are exempt from the tobacco surcharge for the entire plan year, then tobacco users who satisfy the plan’s RAS must be retroactively reimbursed the amount of the surcharge for the entire plan year. Most of these cases are still waiting to be heard on the merits in those district courts.
Dismissal
Some federal district courts have dismissed the full reward claims, arguing that retroactive reimbursement is not required. For example, the U.S. District Court for the District of Rhode Island in late 2025 dismissed a tobacco surcharge case, ruling that federal law does not require retroactive reimbursement of plan participant surcharges after completion of a tobacco cessation program (the wellness program’s RAS). The case has been appealed to the First Circuit Court of Appeals by the company’s employees, which could become the first appellate court to address this line of cases.
Settlement
Some employers have chosen to settle the tobacco surcharge lawsuit filed against them instead of continuing through the judicial system, which can be costly and time-consuming. The settlements range from around $135,000 to over $5 million.
Courts rule on other allegations
RAS notice requirements violations
At least one court has dismissed RAS notice violation claims where a summary plan description included required disclosure language substantially the same as the DOL’s model notice, and the allegations about other deficient “plan materials” were vague. However, another court allowed an employee to move their case forward with a single claim challenging the employer’s failure to inform workers that they can submit a note from their doctor that will be considered when determining how to assess the tobacco surcharge.
ERISA fiduciary violations
At least one court has dismissed ERISA fiduciary violation claims by treating wellness program adoption as a settlor function rather than a fiduciary function. Other courts have allowed fiduciary claims to continue.
Going forward
- Employers imposing a tobacco surcharge in connection with their group health plan should be aware of the numerous lawsuits that have been filed. They should consult legal counsel to ensure that the program is designed to comply with the applicable wellness program regulations
- Employers should review the terms of their tobacco surcharge program to ensure that each individual is eligible to receive the full reward upon completion of the RAS and that a description of the RAS is adequately communicated to employees by including it within all plan materials discussing the tobacco surcharge. Employers should consult with legal counsel on the definition of full reward as it relates to any tobacco surcharge program