Is Your Employer’s Tobacco or Nicotine Surcharge Legal?

You open your pay stub and notice that more money than expected has been deducted for health insurance. After reviewing the details, you find the reason: a tobacco or nicotine surcharge.

Perhaps you disclosed during open enrollment that you smoke cigarettes, vape, use smokeless tobacco, or consume another nicotine product. Now your employer is charging you an additional amount every month for health coverage.

Can an employer legally do that?

In some circumstances, yes. Federal law allows certain employer-sponsored health plans to impose substantial tobacco-related premium surcharges. But employers do not have unlimited authority to charge employees more simply because they use tobacco or nicotine.

A tobacco surcharge generally must be connected to a properly designed wellness program. That program must offer employees a legitimate way to avoid or recover the surcharge—and employees usually cannot be required to quit using tobacco completely to receive that benefit.

When an employer fails to offer a compliant alternative, does not disclose it clearly, or refuses to provide the full financial reward after an employee satisfies the alternative, the surcharge may violate federal benefit-plan requirements.

What Is a Tobacco or Nicotine Surcharge?

A tobacco or nicotine surcharge is an additional amount an employee may be required to pay for employer-sponsored health insurance because the employee uses tobacco or nicotine products.

The surcharge may appear as:

• A separate deduction on a paycheck
• A higher employee health insurance contribution
• The loss of a wellness discount
• A “tobacco user” or “nicotine user” premium adjustment
• A higher cost for covering a spouse or another dependent who uses tobacco

Employers commonly determine tobacco status through a questionnaire or self-attestation completed during initial enrollment or annual open enrollment. Depending on the wording of the plan, the surcharge may apply to cigarettes, cigars, vaping products, chewing tobacco, snuff, or other products containing nicotine. Some plans may use definitions that also reach nicotine gum, patches, or similar products, making it important to read the plan’s exact language.

Although these programs are sometimes described as discounts for nonsmokers, federal rules treat both rewards and penalties as wellness incentives. In other words, calling the charge a “surcharge” rather than the loss of a “discount” does not necessarily change the employer’s legal obligations.

Why Are Tobacco Surcharges Allowed?

Federal health-plan nondiscrimination rules generally prohibit group health plans from charging similarly situated employees different premiums because of health-related factors. These protected health factors include medical conditions, disability, health status, claims history, receipt of healthcare, and evidence of insurability.

Tobacco-related wellness programs are a limited exception to that general rule.

Under federal rules, the total reward or penalty connected to a health-contingent wellness program generally cannot exceed 30% of the total cost of coverage. For programs specifically designed to prevent or reduce tobacco use, the limit may be as high as 50% of the total cost of the applicable health coverage. That calculation may include both the employer’s and employee’s contributions, not merely the amount deducted from the employee’s paycheck.

That potential 50% differential helps explain why some workers face tobacco surcharges worth hundreds or even thousands of dollars over the course of a year.

But the 50% limit is not automatic permission for an employer to impose any tobacco surcharge it chooses. To qualify for the wellness-program exception, the program must satisfy several additional requirements.

The Important Catch: Employees Must Have a Reasonable Alternative

A program that charges tobacco users more is generally considered an “outcome-based health-contingent wellness program.” That means the financial reward depends on achieving a particular health-related outcome (in this case, being classified as a non-tobacco user).

Because the program is outcome-based, an employee who does not meet the initial standard must be given a “reasonable alternative standard” or, in appropriate circumstances, a waiver of that standard.

A reasonable alternative standard is another way for the employee to earn the same premium discount or avoid the same surcharge without achieving the original health outcome.

For a tobacco program, the alternative might involve:

• Enrolling in or completing a tobacco-cessation course
• Participating in educational sessions
• Working with a health coach
• Following a structured cessation program
• Trying a nicotine-replacement method
• Following recommendations from the employee’s physician
• Completing another reasonable activity selected by the plan

The plan generally may not tell an employee, “Quit smoking or pay more,” without providing another way to qualify for the lower premium. Department of Labor guidance specifically recognizes that attending educational classes or trying a nicotine patch could serve as alternatives to being a nonsmoker.

You May Not Have to Quit to Avoid the Surcharge

This is one of the most frequently misunderstood parts of tobacco wellness programs.

The alternative is not supposed to be merely another demand that the employee successfully stop using tobacco. An employee may qualify for the full financial reward by completing the reasonable alternative, even if the employee does not ultimately quit.

For example, suppose an employer charges tobacco users an additional $100 per month but allows employees to avoid the charge by completing an approved cessation course. An employee who enrolls in and completes that course may be entitled to the same premium rate as a nonsmoker, even if the employee continues to use tobacco afterward.

The purpose of the alternative is to give employees a genuine path to the reward. It is not supposed to be an empty formality, an impossible standard, or a disguised requirement that every participant produce the same outcome.

The employer or plan may establish reasonable participation requirements, but the program must be reasonably designed to promote health or prevent disease. It cannot be overly burdensome or function primarily as a way to impose higher insurance costs based on a health factor.

Employees Who Complete the Alternative Are Entitled to the Full Reward

Providing an alternative is not enough. The employer must also provide the full reward to employees who satisfy it.

The plan generally cannot:

• Give the employee only part of the premium discount
• Start the discount only after the course is completed without addressing earlier surcharges
• Prorate the reward simply because the employee completed the alternative during the year
• Refuse to refund surcharges already paid during the applicable plan year
• Provide a smaller reward than the one received by employees who met the original nonsmoker standard

Federal regulations require the same full reward to be available to employees who satisfy the reasonable alternative as to employees who meet the original health standard.

For example, if an employee completes the alternative on April 1, the plan may need to account for the premium discounts associated with January, February, and March. The plan may have some flexibility regarding how it delivers the earlier amount, such as a retroactive payment or reasonable adjustments during the remainder of the year. But the employee must ultimately receive the full reward for the applicable period.

An employer that simply stops future deductions while keeping all previously collected surcharges may not be providing the full benefit required under the wellness-program rules.

Employers Must Clearly Disclose the Alternative

Employees should not have to uncover the reasonable alternative by accident.

Plan materials describing the tobacco surcharge or premium differential are generally required to disclose:

• That a reasonable alternative standard is available
• How the employee can request or obtain the alternative
• Contact information for the appropriate plan representative
• The possibility of a waiver, when applicable
• That recommendations from the employee’s personal physician will be accommodated

The disclosure should appear in materials that describe the surcharge itself. That may include enrollment guides, wellness-program descriptions, premium charts, benefit summaries, or notices stating that an employee failed to meet the nonsmoker standard.

The employer generally should not advertise the surcharge prominently while hiding the alternative in an obscure document employees are unlikely to find. Federal regulations explain that a plan document referencing a premium difference based on tobacco use is describing the terms of the wellness program and therefore must include the required alternative-standard disclosure.

This paperwork matters. A tobacco program does not necessarily become compliant merely because someone in human resources knows an alternative exists. Employees must be properly informed of the option.

What Happens When the Standard Alternative Is Not Medically Appropriate?

A standard cessation program may not be appropriate for every employee.

For example, a particular medication, nicotine-replacement product, physical activity, or treatment recommendation may be medically inadvisable because of an employee’s health condition.

When an employee’s personal physician states that the plan’s alternative is not medically appropriate, the plan generally must offer another reasonable standard that accommodates the physician’s recommendations. The employee must be given a realistic way to receive the same reward rather than being forced into an unsuitable program or automatically charged the surcharge.

The exact process may depend on whether the employer’s alternative is activity-based or outcome-based. Employees should carefully follow the plan’s procedures and retain copies of any physician statements or communications submitted.

Where Employers May Get Tobacco Surcharges Wrong

A tobacco surcharge can look straightforward on a benefits spreadsheet while still failing to satisfy federal requirements.

Possible warning signs include:

No Alternative Is Offered

The enrollment form asks whether the employee uses tobacco and automatically applies a surcharge to anyone who answers yes, without providing another way to qualify for the lower premium.

The Employee Must Actually Quit

The employer offers a cessation program but says the employee will continue paying the surcharge unless the employee proves that they have completely stopped using tobacco.

The Alternative Is Hidden

The surcharge is displayed in the enrollment guide or premium chart, but the reasonable alternative is disclosed only in a separate document that employees are not given or told how to find.

The Alternative Is Too Difficult or Expensive

The employer requires an unreasonable time commitment, tells the employee to locate a program without assistance, or forces the employee to pay the cost of an educational program that the plan selected. Federal regulations provide that when an educational program is used as the alternative, the plan must make it available or help the employee find it and may not require the employee to pay for the program.

Previously Paid Surcharges Are Not Returned

The employee completes the alternative, but the employer only stops future charges and refuses to provide the portion of the reward associated with earlier months.

Physician Recommendations Are Ignored

The employee provides medical documentation explaining why the standard alternative is inappropriate, but the plan refuses to consider another option.

The Employer Does Not Permit Annual Qualification

Eligible employees generally must have an opportunity to qualify for the reward at least once each year. A plan that permanently classifies someone as a tobacco user without a meaningful annual opportunity to change that classification or complete an alternative may raise compliance concerns.

Self-Attestation Does Not Make the Rules Optional

Many tobacco surcharge programs operate largely through self-attestation. Employees answer questions about tobacco or nicotine use, and employers may not routinely perform nicotine tests or other screenings.

That does not make the program low-stakes.

The central legal issue is often not whether an employee actually smoked, vaped, or used nicotine on a particular day. Instead, the issue may be whether the plan’s paperwork, enrollment process, disclosures, alternatives, and refund procedures complied with federal requirements.

Employees should answer enrollment questions honestly. At the same time, employers and plan administrators must administer the program lawfully, disclose the available alternatives, and provide the complete reward when an employee qualifies.

What Should You Do if You Are Paying a Tobacco Surcharge?

Start by examining your pay stubs and health insurance deductions. Identify the amount of the surcharge, when it began, and how much you have paid during the current and previous plan years.

Next, collect your benefit documents, including:

• Your enrollment materials
• The Summary Plan Description
• The Summary of Benefits and Coverage
• Wellness-program notices
• Tobacco or nicotine affidavits
• Emails or messages from human resources
• Proof that you enrolled in or completed an alternative program
• Records of any refund or premium adjustment you received

A Summary Plan Description, commonly called an SPD, explains important terms of an employer-sponsored benefit plan, including eligibility requirements, participant rights, and procedures for making claims or requesting benefits. Many private-sector employer health plans are governed by the Employee Retirement Income Security Act, or ERISA, a federal law that establishes standards and protections for employee benefit plans.

Ask human resources or the plan administrator in writing whether a reasonable alternative standard is available. Request the instructions, deadlines, and an explanation of whether completing the alternative will result in reimbursement or credit for surcharges already paid.

Keep copies of every response. Do not assume the charge is permanent merely because it has appeared on your paycheck for months or years.

State Law May Provide Additional Protections

Federal wellness-program requirements are not necessarily the only laws that apply.

Some states have laws protecting employees from discrimination based on lawful activities or lawful product use outside the workplace. State insurance laws may also affect insured employer health plans. The scope of these protections, and whether they restrict or permit tobacco-related premium differences, varies considerably.

The Department of Labor notes that state laws may provide protections beyond federal HIPAA requirements, particularly for insured plans. Employees can review their Summary Plan Description to determine whether their coverage is insured and may also consult their state insurance department.

Because the interaction among ERISA, federal wellness-program regulations, state insurance rules, and employment protections can be complicated, employees should avoid assuming that a surcharge is always legal or always illegal based solely on a general description.

Contact Morgan & Morgan About a Potentially Improper Tobacco Surcharge

A nicotine or tobacco surcharge can quietly take a significant amount of money from an employee’s paycheck. While these surcharges may be lawful when administered through a compliant wellness program, employers and plan administrators must follow the rules.

Employees may have questions when no alternative was offered, the alternative was buried in paperwork, quitting was improperly required, medical recommendations were ignored, or the full premium benefit was not provided after the employee completed the program.

An employment or employee-benefits attorney can review the plan documents, deductions, disclosures, and communications to determine whether the surcharge was properly administered and whether reimbursement or other relief may be available.

Morgan & Morgan believes employees should not have to navigate complicated benefit-plan rules alone. Contact Morgan & Morgan for a free case evaluation to learn more about your legal options.