Quick Hits
- The federal government released FAQs that confirm employers are not required to retroactively allocate the full reward for a wellness program when an employee completes a reasonable alternative standard. The guidance applies to health-contingent, outcome-based wellness programs.
- The FAQs provide welcome DOL enforcement relief, but they do not eliminate private litigation risk or resolve all open compliance questions for wellness programs.
- Federal law requires employers to provide a reasonable alternative for employees who cannot satisfy an initial standard under an outcome-based wellness program because of their medical condition.
- The FAQs are not binding on federal courts.
Background
In an effort to help plans address rising healthcare costs, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Affordable Care Act (ACA) permit employers to reward employees for healthy habits through employer-sponsored wellness programs. These may include weight loss programs and tobacco cessation programs. If enough employees participate, a wellness program could prevent absenteeism for medical reasons and reduce a plan’s costs related to pharmaceuticals and doctor visits.
The federal agencies issued final regulations on nondiscriminatory wellness programs in 2006 and 2013. The new FAQs state that the requirement for retroactive application of the award was in the preamble to the 2013 final regulations, but was not in the regulatory text. The federal agencies confirmed they will not take enforcement action against an employer for failing to provide a full reward retroactively to the beginning of the plan year after an employee satisfies a reasonable alternative standard. Employers only need to provide the reward prospectively, when the employee completes the alternative standard, if retroactive rewards are not otherwise provided.
There are multiple class actions pending nationwide that challenge the validity of tobacco surcharge wellness programs. Several of these cases have settled, resulting in millions of dollars of settlement payments.
Reasonable Alternative Standards
Health-contingent wellness programs can be activity-only or outcome-based. The wellness program rewards are contingent on activity when they require action, such as completion of a certain number of nutrition training sessions, exercise classes, or daily nutrition logs. When a reward is based on an outcome, like achieving a certain weight, body-mass index (BMI), blood pressure level, or cholesterol level, the employer must provide a reasonable alternative standard for employees who have medical conditions, such as diabetes or hypothyroidism, that prevent them from meeting the target. The employer also may waive the requirement completely for those with certain health conditions.
An employer cannot legally impose a financial penalty on tobacco users if they fail to quit, unless it provides a legally compliant tobacco-cessation program as an alternative to remove the surcharge.
Wellness Program Communication
The FAQs include a reminder that plans must disclose the availability of a reasonable alternative standard in wellness program materials and notices, if the program is health-contingent. The notice must contain contact information for obtaining a reasonable alternative standard and a statement that recommendations from an individual’s personal physician will be accommodated.
Prior guidance included sample language for this purpose. This requirement creates communication challenges because including reasonable-alternative-standard language in every wellness-related communication can make participant materials longer and arguably more difficult to understand and more likely to be ignored. The FAQs helpfully remind plan sponsors that, under prior guidance, if plan materials merely mention that a wellness program is available, without describing its terms, this disclosure is not required.
Types of Rewards
Some common rewards include discounts on health insurance premiums, contributions to a flexible spending account or health savings account, additional paid time off, wearable fitness trackers, subsidized gym memberships, points to purchase items online, and company swag. The Internal Revenue Service (IRS) treats cash and most gift cards as taxable income, so those generally must be reported as compensation, even if they are connected to a wellness program. They can also raise deferred compensation issues under Code section 409A, and wage-and-hour issues in some instances.
These wellness program rewards have increasingly become the target of plaintiffs’ attorneys. Since the ACA was adopted, wellness program incentives and related regulations have been challenged under the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA), particularly where plaintiffs have challenged whether incentives are truly voluntary or instead coercive.
Federal law prohibits wellness program rewards that are coercive, discriminatory, or structured to penalize employees with certain health conditions. “[A]ny wellness program must be reasonably designed, based on all the relevant facts and circumstances, to promote health or prevent disease, and that plans and issuers must ensure that the program is not a subterfuge for discrimination or underwriting based on a health factor, or any of the other requirements for wellness programs,” the guidance states.
It is illegal for the total value of all wellness rewards to exceed 30 percent of the total cost of employee-only health insurance, except for tobacco cessation programs, which can reward up to 50 percent. When designing the incentives, employers may want to consider the impact of any premium discounts or surcharges on whether their health plan will meet ACA affordability requirements.
Next Steps
Although the FAQs provide welcome relief from the agencies’ current enforcement position, they do not eliminate litigation risk. Courts may give limited deference to the guidance, and private plaintiffs are not bound by the guidance. Plan sponsors may wish to proceed cautiously before making changes to their wellness programs based on the guidance.
However, the guidance serves as an important reminder that, as plans move into open enrollment season, they may want to ensure that:
- Any communications regarding the wellness program include required disclosures, and the wording is evaluated with the recent litigation risks in mind.
- Incentives meet the applicable ACA limits and other limits.
- Rewards are being treated appropriately for tax purposes, including withholding and reporting as applicable.
- Any modifications to ensure that programs are providing a sufficient return on investment comply with applicable legal requirements.
Employers may wish to evaluate their wellness programs to determine whether they are meeting objectives, such as reducing healthcare costs, reducing absenteeism, or improving retention rates. If a wellness program is not getting enough participation, changing the size or type of reward may help to boost participation rates.
Not having to provide a reward retroactively may help employers implement a larger reward and not have to absorb as much of the cost. Employers may wish to train HR and managers on how to properly handle requests from employees who want to complete a reasonable alternative standard and receive the wellness reward.
Ogletree Deakins’ Employee Benefits and Executive Compensation Practice Group will continue to monitor developments and will post updates on the Employee Benefits and Executive Compensation, Employee Engagement, Employment Tax, and Healthcare blogs as additional information becomes available.
Karen N. Brandon is a shareholder in Ogletree Deakins’ Morristown office.
Carly E. Grey is a shareholder in Ogletree Deakins’ Washington, D.C., office.
Mark E. Schmidtke is a shareholder in Ogletree Deakins’ Chicago office.
This article was co-authored by Leah J. Shepherd, who is a writer in Ogletree Deakins’ Washington, D.C., office.
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