Wellness program FAQs: Agencies ease enforcement while courts continue shaping the rules

Last week, the Departments of Labor, Health & Human Services, and Treasury (the Agencies) announced a new non-enforcement position on “full-rewards” offered by health-contingent wellness programs, specifically addressing programs that do not offer a retroactive reward.

These recent FAQs (opens a new window) may ease the administration and regulatory enforcement of wellness program designs. However, it’s important to note that they do not hold the same weight as statutes and regulations and may not impact the risk of litigation.

Executive Summary

• The Agencies announced a NEW non-enforcement position on how they will view “full rewards” offered by health-contingent wellness programs.

• Specifically, the Agencies will not take enforcement action against a plan that provides a wellness program reward on a prospective basis (e.g., as of the date a participant satisfies a reasonable alternative standard) rather than retroactively to the first day of the plan year.

• The statutory language does not include this clarification, so private litigation is still a risk.

Impetus for these FAQs?

Historically, regulators like the DOL have scrutinized the mechanics of employer-sponsored wellness programs, particularly health-contingent wellness programs or outcomes-based programs, including (1) whether participants who satisfy a reasonable alternative standard (RAS) must receive a retroactive "full reward" back to the beginning of the plan year, and (2) how prominently reasonable alternative standard notices must be disclosed in plan materials. At the same time, plaintiffs' attorneys have aggressively challenged these programs through a growing wave of class action litigation, alleging that employers failed to properly administer tobacco surcharges and wellness incentives. Many of the ongoing court cases allege failure to provide a “full reward” because rewards were not applied retroactively to the beginning of the plan year once a RAS was satisfied. Additionally, the cases allege failure to disclose the availability of a RAS because the disclosure language was not in multiple places that reference the program.

These FAQs provide some relief for employers, at least in terms of the Agencies’ position with regard to enforcement, and may guide court decisions going forward, but only time will tell.

LOCKTON COMMENT: FAQ guidance comes directly from government agencies and provides insight into their current enforcement posture. While helpful, they do not have the force of law, do not revise existing regulations, and do not bind private litigants or courts. A court could still conclude that a wellness program fails to satisfy HIPAA wellness requirements notwithstanding the Agencies' non-enforcement position.

Agencies will not require retroactive wellness rewards

HIPAA generally permits employers to offer wellness program incentives, including premium discounts, premium surcharges, or other financial rewards tied to health-related outcomes. However, health-contingent wellness programs must satisfy several requirements designed to ensure individuals can reasonably qualify for the reward.

For example, a tobacco surcharge program may offer a lower premium to participants who certify they do not use tobacco. Individuals who use tobacco, however, must have an opportunity to earn the same reward through a RAS such as completing a smoking cessation program. Similarly, a biometric screening program may need to provide an alternative path to the reward for participants who cannot satisfy a targeted outcome because of a medical condition.

LOCKTON COMMENT: For clarity, “full reward” can refer to either a reward (i.e., a non-smoker discount) or a penalty (i.e., a tobacco user surcharge). Plan sponsors have the choice between a carrot or stick approach, but the “full reward” concept applies to both.

Now, the Agencies are suggesting plan sponsors have more flexibility to design wellness programs in a way that eases some of the administrative burden and encourages participants to comply with wellness program requirements in a timely manner. This includes pro-rated rewards (or lack of penalty) for mid-plan year compliance with wellness program requirements. For example, let’s say a wellness program offers $50/month to participants who are not tobacco users. Tobacco users either receive the monthly penalty or attend smoking cessation classes as a reasonable alternative standard. In this scenario, the new FAQ indicates that the DOL will not take issue with a wellness program that only provides the reward prospectively to tobacco users once they have completed the RAS (i.e., attending smoking cessation courses) without needing to retroactively reward them for the previous months in the plan year.

LOCKTON COMMENT: Many employer-sponsored wellness programs require participants to earn the reward (or avoid the penalty) prior to the start of a plan year. These FAQs would not impact those programs from still applying the reward (or penalty) as of the first day of the plan year.

Take note, wellness programs must still provide sufficient time for individuals to complete the alternative standard and receive a reward under the program. The takeaway here is that the Agencies’ views on whether the reward is required to be provided retroactively seems to have shifted in light of the lack of clarity in the statute.

LOCKTON COMMENT: From a risk management perspective, employers should continue evaluating wellness program design decisions through both compliance and litigation lenses. Although the recent FAQs and court decisions may support prospective application of rewards, plan sponsors should recognize that plaintiffs' attorneys are likely to continue challenging tobacco surcharge programs until appellate courts provide more definitive guidance or regulators formally revise the regulations. Additionally, some states limit smoker surcharges or prohibit surcharges altogether; however, for ERISA-governed health plans, there is a strong argument that these state smoker surcharge laws are preempted by ERISA. Ultimately, plan sponsors may want to work with their legal counsel before making changes to their wellness plans.

RAS notice requirement

The FAQs also address the wellness RAS notice requirement. Specifically, the Agencies point to the 2013 final rules requiring a plan or issuer to disclose the availability of a RAS in any plan material that mentions that a reward/penalty applies. On this point, the FAQs emphasize that disclosure is not required if the plan materials simply mention that such a program is available without describing the standards of the program.

The takeaway is that articulating the availability of the RAS is only required if the plan materials discuss the program specifics. For those wondering what this notice might look like, the FAQs point to sample language under the 2013 final rules which make disclosure easy for plan sponsors.

Sample language. The following language, or substantially similar language, can be used to satisfy the notice requirement of paragraphs (f)(3)(v) (opens a new window) or (f)(4)(v) (opens a new window) of this section: “Your health plan is committed to helping you achieve your best health. Rewards for participating in a wellness program are available to all employees. If you think you might be unable to meet a standard for a reward under this wellness program, you might qualify for an opportunity to earn the same reward by different means. Contact us at [insert contact information] and we will work with you (and, if you wish, with your doctor) to find a wellness program with the same reward that is right for you in light of your health status.

What plan sponsors can do now

Overall, the good news is that plans can rely on FAQs Part 74 with respect to regulatory enforcement. However, plan sponsors may not want to rush to make wellness program design changes just yet. For plans with retroactive rewards already in place, it may be best to “stay the course.” Keep in mind that participants still have a private right of action to sue, and current statutory language does not include the FAQs’ “full reward” clarification.

We will continue to monitor litigation trends across the nation to see if the Agencies’ guidance and enforcement position will impact court rulings going forward.

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