Huntington Ingalls Industries Inc., a military shipbuilding company, is the latest to face a class action lawsuit over its tobacco surcharge practices under its employee health plan. The plaintiffs claim that the company has violated the anti-discrimination provisions of the Employee Retirement Income Security Act (ERISA) regarding health-related surcharges for plan participants. More specifically, the plaintiffs allege that Huntington Ingalls’ $600 yearly penalty for tobacco users covered by the health or critical illness insurance plan violates federal law, as the company provides no legally valid wellness program allowing tobacco users to avoid the surcharge. According to the plaintiffs, the company also refuses to retroactively reimburse the surcharge to employees who later complete tobacco cessation programs.
ERISA generally prohibits group health plans from charging participants higher premiums based on health status-related differences, including tobacco use. However, group health plans may charge different premiums for certain groups as part of a bona fide wellness program that meets federal requirements. These programs, including those with tobacco-free goals, must meet various conditions to be valid under federal law and to avoid discrimination that violates ERISA. For instance, the wellness program must:
- Be reasonably designed to promote health or prevent disease;
- Provide a reasonable alternative standard to any individual who does not meet the initial standard based on a health factor-related measurement; and
- Not be overly burdensome or a ploy to discriminate based on a health factor.
The Huntington Ingalls lawsuit is one of numerous cases nationwide filed against plan sponsors alleging illegal imposition of tobacco surcharges. Some of the legal issues raised in these lawsuits include inadequate notice to plan participants, failure to offer valid alternative standards, and failure to retroactively reimburse participants who later comply with plan standards.
For example, Bokma v. Performance Food Grp., Inc., is a similar case pending in the federal district court for the Eastern District of Virginia. That employer charges annual tobacco surcharges for employee and their spouses or domestic partners. Although the employer offered a smoking cessation program for tobacco users, the plaintiffs claim that the surcharge nonetheless violates ERISA’s anti-discrimination provision, fails to provide participants with adequate notice of reasonable alternative standards, and constitutes a breach of fiduciary duty.
Likewise, the Tennessee federal court case of Bailey v. Sedgwick Claims Mgmt. Servs. Inc. involves a tobacco surcharge. The court allowed the case to move forward, finding that the plaintiff had standing to bring claims that the surcharge violated ERISA, including failure to notify and breach of fiduciary duty claims. That court also noted that the employer can refund the surcharge and operate within ERISA’s confines moving forward.
In addition to the text of ERISA, the U.S. Department of Labor (DOL) has issued guidance on ERISA compliance for employers that wish to impose tobacco surcharges on health plan participants. The DOL clarifies in its guidance that if a participant has a reasonable opportunity to enroll in a tobacco cessation program to avoid the surcharge at the beginning of the plan year, the employer does not need to offer another opportunity during the plan year. In other words, the employer is not required to offer enrollment in a cessation program until renewal of or reenrollment in the health insurance policy for the following plan year. Nonetheless, the DOL also opines that a plan may include rewards, including pro-rated rewards, if a person enrolls in a cessation or other wellness program at any time during the plan year.
ERISA applies to all rules used for “underwriting purposes” by health plans, which include:
- Rules for the determination of eligibility for benefits;
- Computation of premium or contribution amounts; and
- Other activities related to the creation, renewal, or replacement of health insurance contracts.
Additionally, these regulations prohibit plans from using genetic information for underwriting purposes, and may not request, require, or purchase this information before an individual’s enrollment. Nonetheless, plans may request genetic information for research purposes under certain circumstances, provided it is voluntary. Interestingly, the Secretary of Labor has the authority to assess penalties for violations of the genetic information provisions in ERISA. However, the Secretary also may not assess penalties for violations with reasonable cause that plans correct within 30 days, and also may waive penalties for violations if excessive.
The ongoing litigation challenging tobacco surcharges in health plans can be complex for plan sponsors. The legal theory that unites these lawsuits remains untested in many U.S. jurisdictions, which creates uncertainty for employers when it comes to tobacco-related wellness programs.
As a result, plans should take extra care to ensure that wellness programs meet all regulatory requirements, particularly regarding notice of reasonable alternative standards, availability of cessation programs, and retroactive reimbursement requirements. Plans should also maintain clear documentation of their efforts toward compliance and of how their wellness programs genuinely promote health.
The outcome of these suits, including the Huntington Ingalls case, may provide additional guidance on the continued use of tobacco surcharge programs in health plans. Therefore, plan sponsors should regularly evaluate their programs in light of changes in the law resulting from court rulings.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.
