Our client has a self-funded plan and would like to implement a tobacco surcharge. They are leaning heavily toward allowing a smoking cessation program to equal being a non-tobacco user.
- Is it best to handle the surcharge (a nominal $25-$50/month chart) on a pre-tax or post-tax basis?
- Is it required that a reasonable alternative (e.g. smoking cessation program) be offered?
- The group is headquartered in Pennsylvania, but has a location in California. We understand that tobacco surcharges are not permitted in California but also that self-funded plans are not required to adopt state mandated benefits. Would they be required to follow California mandates?
It sounds like your client has a self-funded welfare plan that includes a health-contingent wellness plan with an “outcome-based” component, i.e. participants receive incentives tied to achieving the health status goal of not using tobacco. Health-contingent programs have complicated compliance requirements under federal law, including reward and design constraints. Fortunately, ERISA preempts most state laws applicable to self-funded plans, though states (like California) can still regulate fully-insured or governmental plans operating within its borders.
Under federal law, a self-insured health plan can charge tobacco users up to 50% more for their health insurance premiums than non-tobacco users. However, the plan must provide participants a reasonable alternative standard (“RAS”) – such as completion of a smoking cessation program – that, if met, would provide the full reward. The plan must also pay the full costs of any such program, provide an opportunity for participants to qualify for the full reward at least once per year, and provide disclosures to participants that include details about the availability of the RAS.
Assuming that plan premiums are withheld from employee paychecks on a pre-tax basis, any surcharge would also apply pre-tax, since the surcharge is tied to the premium.
For more detailed information about wellness plan compliance and implementation, see this recent article from The Nebraska Lawyer, written by two members of the Kutak Rock Employee Benefits group.