Annual enrollment is the time of year when employers often look to make changes in their plan designs and the contribution employees pay for group health plan coverage. One of the changes often under consideration is a smoking cessation incentive in the form of premium differential for employees that smoke versus those that do not or choose to quit. What employers sometimes fail to recognize is that it must be done through an employer-sponsored wellness program to be compliant. In this post, we help clear some of the confusion surrounding smoking cessation programs by briefly looking at some common considerations.
First, it is important to understand that when an employer requires an employee to be a non-smoker in order to receive an incentive, the program is considered “outcome-based” under the Health Insurance Portability and Accountability Act (HIPAA). This is because the program requires an employee to achieve a health outcome (e.g., being smoke-free) in order to receive the reward.
Next, it is important for employers to consider how they will determine which employees are smokers and which are non-smokers. There are generally two ways an employer may make that determination: 1) employee affidavit, or 2) biometric testing for tobacco use. Depending on whether an employer chooses to test employees for nicotine or simply require that employees sign affidavits, different laws and regulations apply. Employers requiring signed affidavits will need to comply with the Health Insurance Portability and Accountability Act (HIPAA) and the Affordable Care Act. While employers choosing to test individuals will have to comply with HIPAA and the Americans with Disabilities Act.
Knowing which laws and regulations apply is important because they determine, for example, the amount of the incentive that may be rewarded, and the kinds of notices and disclosures that must be provided to employee plan participants. Regardless of whether employers will require an affidavit or a nicotine test, one thing that applies to both is that an outcome-based program must –
- Offer a reasonable alternative standard (RAS) that is activity based (e.g., completing a certain number of smoking cessation classes) to anyone that does not meet the health outcome (e.g. being a non-smoker); and
- Provide the full amount of the reward/incentive to any participants that complete the RAS.
Employers often want to prorate a reward for individuals that complete the RAS mid-plan year, but prorating the incentive is strictly prohibited under HIPAA. In general, HIPAA limits rewards for outcome-based programs to 30% of the employee-only premium (if only employees are eligible to participate) and up to 50% of the premium when the health factor is tobacco use. However, the ADA rules also apply when an employer collects health information through biometric testing. Currently, incentives issued by the EEOC, the enforcement arm of the ADA, have been vacated but new guidance is expected soon.
Finally, employers should consider the federal tax implications of their programs’ reward(s) when designing a wellness program. Cash or cash-equivalent rewards (e.g., gift cards) are always taxable, no matter the amount. In contrast, employer contributions to a health savings account (HSA), reduced major medical premiums, and benefits and services that are medical care (e.g., health risk assessment) are generally not subject to taxation. For example, an employer wanting to incentivize its employees to participate in a smoking cessation program with a tax-free reward could offer the incentive of lower medical premiums to those that sign the “tobacco-free” affidavit or complete the (activity-based) reasonable alternative that requires attending six smoking cessation classes.
Because different rules apply depending on the design of a smoking cessation program, careful consideration is required to ensure compliance. Employers should keep in mind the following:
1. Wellness programs can be more complex than they might seem because there are multiple pieces of legislation that might apply and multiple ways to determine which employees are smokers and which employees are nonsmokers.
2. Plan design matters because it impacts which rules apply and the amount of any applicable incentive.
3. Employers cannot require employees to be tobacco-free without also providing employees a RAS in order to receive the reward.
Want more information regarding wellness program designs? Tune in to tomorrow’s “Wellness Wednesday” at 9 a.m. EST when HORAN’s Health Management Team presents, “Carrot vs the stick…. What works best?”
For any questions or additional information, you can also contact your HORAN account representative.
The information contained in this document is informational only and is not intended as, nor should it be construed as, legal or accounting advice. Neither HORAN nor its consultants provide legal, tax nor accounting advice of any kind. We make no legal representation, nor do we take legal responsibility of any kind regarding regulatory compliance. Please consult your counsel for a definitive interpretation of current statute and regulation, and their impact on you and your organization.