It seems like everywhere you turn, benefits professionals are talking about ways to improve the individual health and financial wellness of employees. Wellness programs are nothing new, but in recent years many programs in the market tout wellness programs as a vehicle used to promote healthy lifestyles and prevent disease. The thinking is that healthier employees bring down the overall cost of health insurance coverage, ultimately creating cost savings for the employer. However, structuring programs that tie in to the company’s group health plan can lead to unwanted compliance issues, and oversight by government agencies including the Internal Revenue Service (IRS), Department of Labor (DOL), Health and Human Services (HHS) (tri-agencies) and the Equal Employment Opportunity Commission (EEOC).
So, what’s the big deal? Because wellness programs come in many forms, from a compliance perspective, things can get tricky. Depending on how the program is structured, it can be subject to a veritable minefield of legal landmines under ERISA, HIPAA, ACA, the Internal Revenue Code (Code), the Genetic Information Non -Discrimination Act (GINA), and the Americans with Disabilities Act (ADA).¹
While there are various types of wellness structures, there are two types that generally come under scrutiny by the tri-agencies. These are (1) participatory programs, and (2) health contingent wellness programs (including activity only, and outcome-based programs). Wellness programs designs may or may not tie to a group health plan. If a wellness program is tied to a group health plan, or if participation in a program leads to a reward tied to a health-based outcome (i.e. a smoking cessation program), then employers must take additional steps to ensure compliance with HIPAA.
HIPAA Compliance Issues
HIPAA requires that wellness benefits be offered on a non-discriminatory basis, i.e. “distinctions among groups of similarly situated participants in a health plan must be based on bona fide employment-based classifications consistent with the employer’s usual business practice.” ² A health-contingent wellness program that is an outcome- based wellness program is compliant where it meets a five-factor test³:
The program provides individuals with the opportunity to qualify for the reward under the program at least once per year;
The reward of the program must not exceed certain percentages described in the regulation;⁴
The program must be reasonably designed to promote health or prevent disease;
The plan must provide uniform availability and reasonable alternative standards to meet the requirements, i.e. the full reward under the outcome-based wellness program must be available to all similarly situated individuals; and
The plan or issuer must disclose the terms of the program and rewards, as well we the availability a reasonable alternative standard to qualify for the reward.⁵
During health plan investigations, the DOL reviews wellness programs to determine compliance with the HIPAA portability rules. Efforts by the DOL to ensure wellness plan compliance go beyond investigations. In late 2017, the DOL filed a complaint in federal court against Macy’s, alleging that its tobacco surcharge wellness program was not in compliance with the five-factor approach prescribed in the HIPAA regulations.⁶ According to the complaint, Macy’s “program included a tobacco surcharge ... for employees enrolled in company-sponsored medical coverage who have used tobacco products within the last consecutive six months or have participating dependents who have used tobacco products within the last consecutive six months.” ⁷ The surcharge ranged from $35 to $45 per month, and according to plan documents, the “tobacco surch arge funds that are collected will be deposited into the Macy’s, Inc. Welfare Benefits Plan Trust and [were] used to pay medical claims and plan administrative expenses.” ⁸ The complaint further alleges that employees continued to receive the tobacco surcharge even if they provided evidence of completion of a tobacco cessation program.
The DOL complaint further alleges that the program failed to offer individuals a reasonable alternative standard, and also failed to provide a notice describing the reasonable alternative standard. The DOL argues that this violation amounted to a breach of fiduciary duty (for failure to act solely in the interest of participants and beneficiaries in accordance with ERISA §404(a)(1)(D)), and a prohibited transaction (alleging that use of the surcharge monies to pay claims and expenses “constituted a direct or indirect transfer to, or use by, a party in interest, of assets in a health plan” in violation of ERISA §406(a)(1)(D)). This lawsuit is significant in that the first of its kind from the DOL. Many are watching to determine the outcome of this pending litigation.
ADA, GINA and Tax Compliance Issues
Separately, certain wellness programs may be required to meet additional requirements under the ADA and GINA.⁹ Generally, the ADA prohibits an employer discriminating against an employee on the basis of a disability, as well as prohibits an employer from denying an employee access to a wellness program on the basis of a disability.¹⁰ GINA prohibits employers from discriminating against an employee on the basis of genetic information. Genetic information obtained through a wellness program will not violate GINA’s provisions where certain requirements are met.
In early 2016, the EEOC released final regulations regarding wellness program compliance under the ADA and GINA. While the requirements set forth in those regulations were very similar to HIPAA’s five-factor test, the EEOC regulations capped the reward incentive at 30% of employee only coverage.¹¹ The regulations became effective January 1, 2017, but were subsequently partially vacated effective January 1, 2019 by a 5th Circuit ruling, requiring the EEOC to revisit its reasoning behind the 30% rewards cap.¹²
If that wasn’t enough, wellness rewards, that are not defined as medical care under Code Section 213(d) (such as gift-cards), may be taxable to employees. What was once thought to be a tool to promote health is now seen as a large headache for many employers. It is easy to see why compliance for these plans has become so complex. If you have any questions as to whether your plan is compliant, please contact one of our attorneys for assistance.
¹ Whether all or some of these rules apply is determined by the structure of the wellness plan. Clients should work with counsel to determine which type of program they run to determine the depth and complexity of compliance.
² Incentives for Nondiscriminatory Wellness Programs in Group Health Plans, 78 Fed. Reg. 33157 (June 3, 2013).
³ 29 C.F.R. §2590.702(f)(3).
⁴ For employee only coverage, the reward may not exceed 30% of the total cost of coverage; for dependent coverage, the reward may not exceed 30% of the total cost of coverage for the employee plus dependents, and the reward may not exceed 50% for tobacco cessation programs.
⁵ 29 C.F.R. §2590.702(f)(3).
⁶ Acosta v. Macy’s, Inc., et al. S.D. Ohio, No. 1:17-cv-00541, complaint filed 08/16/17, amended complaint filed 08/29/17.
⁷ Id.
⁸ Id.
⁹ ADA and GINA requirements govern wellness programs that include either disability related inquiries or medical examinations.
¹⁰ https://www.eeoc.gov/laws/regulations/qanda-ada -wellness-final -rule.cfm
¹¹ Regulations Under the Americans With Disabilities Act, 81 Fed. Reg. 31125 (July 18, 2016).