New Lawsuit: Tobacco Surcharge on Health Insurance Flouts ERISA

With open enrollment season underway, you’re probably looking for ways to offer a competitive benefits package – without blowing the budget. 

One common way to help keep costs in line is to implement a tobacco surcharge. 

And if that’s a strategy you use (or are considering), you’ll probably want to watch a proposed class action recently filed in a New Jersey federal court. It’s the latest in a string of similar lawsuits. 

Campell Soup Faces ERISA Lawsuit

In the lawsuit, Campbell Soup employees allege the company’s tobacco surcharge for health insurance violates The Employee Retirement Income Security Act (ERISA). 

Among other things, the suit asserts that the employer should’ve provided “a reasonable alternative” for individuals who could not meet the initial health requirement, such as participating in a smoking cessation program, to avoid the surcharge. 

Here, the company provides a smoking cessation program, but it only waives the tobacco surcharge for participants who complete the program, the suit alleges. Moreover, the tobacco surcharge would be waived on a prospective basis only for successful participants who complete the program.  

“Participants who complete the program may stop the surcharge for the remainder of the plan year but are not retroactively reimbursed for premiums already paid. This violates ERISA’s requirement that participants receive the ‘full reward’ upon satisfying the alternative standard, as it unfairly denies retroactive relief to participants who complete the program,” the suit claims.

Emerging Trend: Challenges to Tobacco Surcharges

And Campbell Soup isn’t the only employer to face legal action over tobacco surcharges in recent weeks: 

• In mid-September, an employee sued Tractor Supply Co., alleging it implemented a tobacco surcharge without giving her a reasonable alternative, like a tobacco cessation program. Instead, “it required participants to meet the original standard — not being a tobacco user,” the suit alleges.
• In late September, a former 7-11 employee filed a proposed class action alleging the convenience chain imposed a tobacco surcharge without giving workers a reasonable alternative to avoid the penalty.
• In early October, a PepsiCo employee filed a class action lawsuit alleging the beverage company’s tobacco surcharges violated ERISA by targeting employees based on their health status, specifically their tobacco use.

Turning Point: DOL Investigation Opens the Floodgates

Until recently, complaints like this were pretty rare. 

But last fall, the DOL investigated a Chicago food service provider for airlines and found it wrongly imposed tobacco surcharges and improperly charged employees deductibles for certain diagnostic tests.

On Sept. 13, 2023, a federal court in Illinois ordered Flying Food Group to reimburse the affected plan participants.

Relevant here, the investigation determined the company violated federal regulations by charging a tobacco surcharge to employees who disclosed their tobacco use on health benefits enrollment forms. However, the company failed to inform the employees that a reasonable alternative existed that would allow them to avoid paying the surcharge. 

The court ordered Flying Food Group to pay $16,660 to those affected participants.

Is a Tobacco Surcharge OK?

If you’re like many HR pros, you might be thinking: Wait, I thought a tobacco surcharge was OK!

As with so many things in HR, the answer is: Well, it depends … 

The Affordable Care Act (ACA) allows health insurance plans to charge tobacco users up to 50% more in premiums than non-tobacco users. This tobacco surcharge aims to encourage folks to quit smoking and using other tobacco products.

Beyond that, a patchwork of state laws governs tobacco surcharges. Some states have either prohibited or limited the tobacco surcharge. 

However, the majority of states follow federal law and allow full tobacco surcharges – but employer wellness programs must follow certain rules for those surcharges to be legal.

And it would appear that the 2023 DOL investigation discussed above shined a spotlight on areas where employers were making missteps. So how can you avoid a similar mistake?

In 29 C.F.R. § 2590.702(c)(3), the DOL outlines appropriate ways for employers to offer incentives to plan participants in exchange for their participation in the relevant wellness programs. For example, waivers for tobacco surcharges in exchange for participating in a tobacco cessation program.

5-Factor Test for Compliance

The EX program is an industry-leading tobacco cessation program developed in partnership with the Mayo Clinic. 

It has created a five-factor test to help employers develop wellness programs that comply with ERISA wellness incentive rules and allow employers to impose a tobacco surcharge on employees who use tobacco.

Of course, you’ll want to check out the full test at the link above – but here are the highlights:

1. Frequency of opportunity to qualify: Offer the program at least once per year. 
2. Size of reward: Cannot exceed 50% of the total cost.
3. Reasonable design: The cessation program must be reasonably designed to promote health or prevent disease.
4. Uniform availability and reasonable alternative standards: The lower premium must be available to all similarly situated employees, and the program must allow a reasonable alternative standard for participants who can’t meet the initial standard.
5. Notice of other means to qualify for the reward: Among other things, the plan must disclose in all plan materials the terms of a tobacco cessation program and the availability of a reasonable alternative standard to qualify for the lower premium (and, if applicable, the possibility of a waiver).