$160,000 Tobacco Surcharge? Yes, if your Wellness Program is Noncompliant

December 19, 2018

The Department of Labor (“DOL”) is getting serious about wellness programs. In a recent settlement, the DOL imposed over $160,000 in fines and penalties on an employer that failed to comply with wellness program regulations. The settlement included penalties against the employer for breaching its fiduciary duties, but individual employees who administered the wellness program could have been personally liable as well. This settlement significantly raises the stakes for failing to comply with the complex rules that govern wellness programs.

Wellness Program Violations

One of the more common wellness program designs is to impose a premium surcharge on employees who use tobacco products. The Health Insurance Portability and Accountability Act (“HIPAA”) generally allows such surcharges, provided the employer offers a reasonable alternative standard to employees who use tobacco. If an employee satisfies the reasonable alternative standard—typically by attending a free tobacco cessation class—the employee can avoid the premium surcharge.

Dorel Juvenile Group, Inc. included a tobacco surcharge under its wellness program. Under Dorel’s wellness program, employees needed to submit a tobacco use certification form during open enrollment. Employees who certified they used tobacco were required to pay a surcharge between $2.50 and $15.00 per payroll period. Dorel offered free access to smoking cessation classes, but even if employees attended, they could not avoid the tobacco surcharge. The only way for an employee to avoid the tobacco surcharge was to certify that he or she did not use tobacco.

The DOL filed suit against Dorel, and Dorel agreed to pay more than $160,000 to resolve the suit (not counting attorney fees). The key to the DOL’s suit and Dorel’s settlement was the failure of Dorel to offer a reasonable alternative standard to the tobacco surcharge. As part of the settlement, Dorel has 70 days to locate 596 employees and former employees who paid noncompliant tobacco surcharges between 2013 and 2017. The amount of time and money that Dorel will need to expend in the next two months to comply with this last term of the settlement will likely be more painful than the fines and penalties themselves.

ERISA Fiduciary Breach – Employees Beware!

Even more alarming is that the DOL found that Dorel’s improper tobacco surcharge caused Dorel to breach its fiduciary duties under the Employee Retirement Income Security Act (“ERISA”) by failing to act in the best interest of plan participants. As a result of the breach, the DOL assessed nearly $30,000 in civil penalties.

Importantly, ERISA fiduciary liability is not limited to a plan sponsor. Any individual who exercises discretion over the management of an employee benefit plan may be considered a fiduciary. This means that, although this case was brought against Dorel as plan sponsor, the DOL could have imposed fiduciary liability on the Dorel employees who had discretion over the management of the wellness program. These individual fiduciaries could have been personally liable for their fiduciary duty breaches.

Next Steps

Employers offering wellness programs should review their programs in preparation for next year’s benefit offerings to ensure compliance with HIPAA and ERISA. Although the settlement between Dorel and the DOL did not address the additional wellness program rules under the Americans with Disabilities Act (“ADA”) and the Genetic Information Nondiscrimination Act (“GINA”), employers should also consider how those rules affect their wellness programs. (A discussion of the ADA and GINA rules can be found on page 12 of our most recent Employee Benefits Newsletter.) Specifically, any employer offering a wellness program in 2019 should:

  • Review all surcharges and incentives to verify that participants are offered reasonable alternative standards to avoid the surcharge or earn the incentive;
  • Include information on reasonable alternative standards in all major communications and plan documents related to the wellness program;
  • Verify the amount of any incentive is within the limits imposed by the Affordable Care Act, HIPAA, the ADA, and GINA; and
  • Review your company’s fiduciary liability insurance policy to ensure that it covers the fiduciaries of the wellness program.

Additional Information

If you have any questions regarding the Dorel settlement, or if you would like assistance in structuring your wellness program to comply with applicable laws, please contact a member of our Employee Benefits Practice Group listed in the right-hand column.