Recently issued guidance addresses questions raised in a series of lawsuits against health-contingent wellness programs and the tobacco surcharges that some employers use to charge employees enrolled in group health plans. The Department of Health and Human Services (HHS), the Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) and the Department of the Treasury (collectively, the Departments) released frequently asked questions (FAQs) to combat confusion that arose from the 2013 regulations about how employers should handle tobacco surcharges when employees complete a smoking cessation program. The FAQs explain that retroactive rewards are not required and disclosure of an alternative way to receive the reward is not required in all materials.
Background on tobacco surcharges
Tobacco surcharges grew out of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Affordable Care Act (ACA) allowing health plans to offer creative wellness incentives to encourage healthy behaviors, including to promote tobacco cessation programs. A surcharge is an amount added to an employee’s paycheck in addition to their health insurance premium when they confirmed use of tobacco or nicotine products.
Tobacco surcharge legal challenges
Since the ACA inception, class-action lawsuits were initiated by participants of group health plans claiming tobacco-related premium surcharges violate wellness program requirements. The lawsuits generally assert that employers failed to clearly disclose reasonable alternatives, including physician-approved options, and failed to provide the full reward, such as reimbursement for surcharges paid before an employee completed the alternative standard. Some lawsuits also included claims for breaches of fiduciary duties for imposing a surcharge.
Purpose of the guidance
The FAQs, released on August 26, 2026, are intended to reassure employers that they will not be penalized for offering nondiscriminatory wellness programs designed to motivate plan participants to improve their health, according to EBSA Assistant Secretary Daniel Aronowitz in a DOL news release.
Reasonable alternative standard
The ACA distinguishes between two types of wellness programs: activity-only programs, which require participants to perform an activity, and outcome-based programs, which require them to achieve a specific result (for example, stopping smoking). The original 2013 regulations explained that employees who complete a “reasonable alternative standard”—or complete a waiver for the otherwise applicable standard—under an outcome-based program may be entitled to the full wellness reward retroactively. The 2026 guidance now clarifies that the rule does not require a retroactive reward when the program does not otherwise provide one.
Example: If an employee satisfies a reasonable alternative standard in the middle of the plan year, the Departments explain there is no penalty to the employer for providing the wellness reward prospectively—when the standard is satisfied—rather than retroactively to the start of the plan year. However, employers must allow employees sufficient time to complete the alternative standard and earn the reward.
Key takeaway for employers
Since the original guidance was issued, employers have raised questions about when wellness program notices must explain reasonable alternative standards. Question 2 of the FAQs clarifies that the required notice does not need to appear in materials that merely mention the program’s availability without describing its standards or terms.
Employers should review their wellness program materials and notices to confirm that all required language and contact information are included consistently. Attorneys, consultants and other service providers can help assess whether the program’s design and communications comply with applicable requirements.
The 2026 guidance also suggests that the Departments may issue further clarity, guidance or regulations on wellness programs. The International Foundation will be monitoring new information released as well as additional litigation that affects tobacco surcharges.
International Foundation members can find a Smokers’ Premiums InfoQuick in our Benefits Knowledge Center.
Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.
