Tobacco Surcharge Litigation on the Rise

Legal Alert

March 10, 2025

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A recent surge of ERISA class action litigation challenges employer wellness programs that impose penalties on individuals who use tobacco.

HIPAA generally prohibits group health plans from treating similarly situated individuals differently based on a health factor, including tobacco usage.

An exception to this general rule applies to wellness programs that meet certain requirements. The following requirements apply to tobacco surcharge programs:

Eligible individuals must have the opportunity to avoid the surcharge at least once a year.
The tobacco surcharge imposed (together with the incentives for the employer’s other health-contingent wellness programs) cannot exceed 50% of the total coverage costs of the employee and employer.
The program must be reasonably designed to promote health or prevent disease and must not merely penalize participants.
The full reward must be available for all similarly situated individuals, and a reasonable alternative must be available for individuals who are unable to meet the initial standard of being tobacco-free.
The plan must disclose in all materials describing the tobacco surcharge the availability of a reasonable alternative standard (such as a tobacco cessation program) to avoid the surcharge.

Thus, a group health plan may charge higher premiums for individuals who use tobacco products, but it must also offer a reasonable alternative to tobacco users that would grant the “full reward” of avoiding a surcharge altogether or receiving a reimbursement or any surcharge already paid.

Plaintiffs’ Complaints

The recent surge of class action lawsuits include various allegations of noncompliant tobacco surcharge programs, including:

A program that removes the tobacco penalty on a prospective basis and does not also refund prior penalties charged during the plan year fails to provide the “full reward” to participants.
A program that requires an individual to be tobacco-free after completing a tobacco cessation program does not provide a true “reasonable alternative.”
A program that establishes a deadline for participants to complete a tobacco cessation program, such as mid-May, fails to provide a reasonable alternative for earning the “full reward” to all similarly situated individuals.

The class action lawsuits also commonly include arguments that plan materials do not clearly disclose what actions are necessary to avoid the surcharge and allegations that imposing a penalty under a noncompliant program is a breach of fiduciary duty and a prohibited transaction.

At least one lawsuit has survived an employer’s motion to dismiss, and other lawsuits have settled with employers paying out or reimbursing class members amounts ranging from $134,000 to $4.9 million. However, litigation is an ongoing threat, and it remains unclear how courts will respond to the plaintiffs’ allegations.

Recommendations

Employers who sponsor group health plans that include tobacco surcharge program would benefit from reviewing their program and participant communications for compliance and assessing their risk tolerance.

For more information about how group health plans can evaluate their tobacco surcharge programs, please contact a member of our SGR Employee Benefits and Executive Compensation Team.