A wellness program is an initiative offered in connection with a group health plan and designed to promote health or prevent disease. For employers and plan sponsors, the potential value of a wellness plan is clear, with employers reporting improved employee health outcomes and reduced healthcare costs when these programs are thoughtfully designed and administered. Wellness programs are also widely credited with increasing productivity, reducing absenteeism, and strengthening employee engagement and retention. In that sense, a well-designed wellness plan can serve as both a health initiative and a broader workforce-management tool.

Unfortunately, a growing wave of recent class action litigation, much of it aimed at tobacco surcharge programs, has made clear that wellness plan designs can carry compliance and fiduciary risk. The potential risk exposure from such litigation can be material because these programs affect premium contributions across large employee populations. Plaintiffs’ attorneys are incentivized to recast even modest non-compliance as plan-wide violations capable of generating substantial aggregate exposure. As a result, plan designs that went unchallenged for years are now drawing closer scrutiny. This issue is especially timely for employers reviewing their plan designs for the upcoming plan year.

Wellness Plan Requirements and Program Types

The typical incentive offered in connection with a wellness program is a discount (or a surcharge) imposed on group health plan premiums. Under the governing federal rules, these programs fall into two broad categories:

• Participatory Programs. Participatory programs do not condition any reward on satisfying a health-related standard. For example, reimbursing gym membership fees or rewarding completion of a health risk assessment. These are generally permissible so long as they are made available to all similarly situated individuals.
• Health-Contingent Programs. Health-contingent programs condition a reward on meeting a health-related standard and are subject to additional requirements. These programs are further divided into two subcategories:
  • Activity-only programs, which require the performance of an activity (such as walking or exercising) but not attaining a specific health outcome; and
  • Outcome-based programs, which require attaining a specific result, such as a target BMI or non-tobacco-user status.

Health-contingent programs are subject to five additional requirements under federal law: (i) they must give eligible individuals a chance to qualify at least once a year; (ii) they must cap the total reward within prescribed limits, with a higher ceiling allowed for programs aimed at reducing tobacco use; (iii) they must be reasonably designed to promote health or prevent disease; (iv) they must make the full reward available to all similarly-situated individuals; and (v) they must offer and clearly disclose a reasonable alternative standard for anyone who cannot meet the underlying requirement because it is unreasonably difficult or medically inadvisable to do so.

As alluded to previously, some outcome-based wellness programs impose a surcharge on group health plan premiums for tobacco users. A reasonable alternative standard for such a plan design typically means giving tobacco users another way to earn the full reward (i.e., a discount on group health plan premiums) without actually quitting. In practice, this often takes the form of completing an educational course or a tobacco-cessation program, after which the participant receives the same reward as a non-tobacco user, regardless of whether he or she ultimately quits.

The distinction between the various types of wellness programs matters because it determines how much regulatory scrutiny a program receives. Participatory programs are subject to relatively light requirements, while health-contingent programs – those that tie a reward to a health factor – must clear a series of additional conditions designed to protect individuals who cannot readily meet the applicable standard.

Recent Litigation Involving Tobacco Surcharges

The current litigation wave centers on tobacco surcharges, a common outcome-based plan design. Plaintiffs generally allege that employers imposed premium surcharges on tobacco users without offering a compliant reasonable alternative standard, without giving adequate notice of that alternative, or without making the full reward available to participants who later qualified (i.e., employers do not offer the reward retroactively). Suits have been filed against a range of large employers, including companies such as Bass Pro Shops, PepsiCo, 7-Eleven, Tractor Supply, and Casey’s gas stations, and regulators have pursued parallel enforcement actions.

Specifically, in Blalock v. Casey’s General Stores, Inc., a class action lawsuit was brought against Casey’s in the U.S. District Court for the Southern District of Iowa alleging that Casey’s imposed a discriminatory tobacco surcharge without providing participants with a reasonable alternative standard. According to the lawsuit, “the only avenue for smokers to avoid the surcharge is to quit smoking.” Moreover, Casey’s failed to provide a reasonable alternative standard, failed to provide the full (i.e., retroactive) benefit, and breached its fiduciary duty with respect to those matters. Eventually, Casey’s and the plaintiff class settled the lawsuit for $5.1 million earlier this year.

Additionally, in Ruiz v. Bass Pro Group LLC, the plaintiff class filed a lawsuit in the U.S. District Court for the Western District of Missouri against Bass Pro Shops similarly alleging that Bass Pro Shops instituted a noncompliant wellness program with respect to a tobacco surcharge by not providing a reasonable alternative standard (including notice of such reasonable alternative standard), failed to provide the award on a retroactive basis once achieved, and breached its fiduciary duty based on those claims. Bass Pro Shop also settled the class action lawsuit in the amount of $4.95 million last year.

What makes these cases attractive to plaintiffs’ attorneys is the structural nature of the alleged defects. A missing or poorly communicated alternative standard tends to affect every participant subject to the surcharge, which makes class treatment more straightforward and potential relief substantial. Many of these suits are still in their early stages, but their sheer number has already prompted employers to revisit long-standing plan designs and to rethink how their incentives are designed and communicated. The trend also reflects the broader economics of benefits litigation. Because wellness plan terms are typically uniform across a workforce and are documented in plan materials, they lend themselves to standardized claims that can be pursued efficiently on a class basis. Employers should therefore expect continued attention to these programs even as individual cases are resolved or settled.

Practical Takeaways for Employers and Plan Sponsors

The wellness plan litigation landscape points to several concrete measures that employers and plan sponsors can take to reduce their exposure, each of which depends on treating wellness plan compliance as an ongoing obligation rather than a one-time design decision.

First, employers should audit their reasonable alternative standards to the extent a health-contingent wellness program is offered to employees. Every health-contingent wellness program should offer, and clearly describe, a reasonable alternative standard, and the full reward should be provided to participants who qualify through that route, including retroactively where the circumstances call for it.

Second, employers should review their participant communications and plan documents. The availability of the alternative standard should be disclosed in plan materials, and the program’s actual terms should be reflected accurately in the summary plan description and any wrap documents. Gaps between how a program is administered and how it is documented have proven to be a recurring source of exposure in these cases.

Third, compliance should be coordinated across the full set of federal requirements rather than viewed through a single lens. A wellness program that satisfies the wellness rules may still raise questions under federal fiduciary, disability, or genetic-information standards, and employers should document the reasoning behind each incentive so that a sound defense is available if the program is later challenged.

Wellness programs remain a valuable tool for promoting employee health, and the current litigation landscape does not signal that employers should abandon them. It does, however, underscore that the details matter. The difference between a defensible program and a costly one often lies in whether the alternative standard, the required notices, and the plan documents were handled appropriately from the outset. Wellness programs should be designed, documented, and administered as a coordinated whole rather than assembled piecemeal. Employers that treat program design and communication as an integrated compliance exercise will be better positioned to withstand scrutiny than those that address each requirement in isolation. Our employment and employee benefits team understands the complexities related to wellness plan compliance and has the experience to review wellness plan documents and wellness plan compliance matters more generally.

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