Last year, we notified employers about recently filed class action lawsuits related to wellness programs that impose a “smoker’s surcharge” on employee health plan premiums. We are now revisiting that litigation ahead of 2026 as employers evaluate their wellness programs.

A Recap on Wellness Programs

We provided an in-depth look at the rules applicable to wellness programs last year, but to summarize, the nondiscrimination rules under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) prevent employers from, among other things, varying the premiums paid by employees based on a health factor, such as tobacco use.

There is an exception to this rule for wellness programs that satisfy certain conditions. Employers often take advantage of this exception to charge tobacco users a surcharge on their coverage. Non-tobacco users are rewarded by being exempt from the surcharge. Under HIPAA, tobacco users must have an opportunity to receive the “full reward” by satisfying a reasonable alternative standard, such as completion of a tobacco cessation program. Employers must provide adequate notice of this alternative standard when describing the terms of the wellness program.

Tobacco Surcharge Lawsuits

Health plans may impose surcharges of up to 50 percent of the cost of the employee’s health coverage under the guise of tobacco-related wellness programs—which can amount to hundreds or even thousands of dollars per year for each affected employee. Dozens of class action lawsuits have been filed challenging these programs. Several cases have been settled, but the majority are continuing to work their way through the courts.

The cases often raise similar issues:

Issue 1: Meaning of “Full Reward”

Under HIPAA, the “full reward” under the wellness program must be made “available to all similarly situated individuals.” This is accomplished by offering the reward to individuals who either meet a certain standard (e.g., non-tobacco users) or satisfy a reasonable alternative standard (e.g., completion of a tobacco cessation program).

Often at issue in litigation is what constitutes the “full reward” when an individual completes a tobacco cessation program mid-year.

• Regulatory agencies have interpreted “full reward” to require a retroactive reimbursement of any tobacco surcharge that an individual paid in the plan year when the individual qualified for the reward. Some courts defer to that interpretation (see Mehlberg v. Compass Group, USA, Inc., No. 24-cv-04179-SRB, 2025 WL 1260700 (W.D. Mo. Apr. 15, 2025); Bokma v. Performance Food Group, Inc., 783 F. Supp. 3d 882 (E.D. Va. May 20, 2025)). 
• One court declined to defer to the agencies but arrived at the same conclusion: “full reward” means the “same reward.” If non-tobacco users are exempt from the tobacco surcharge for the entire plan year, then so, too, must be tobacco users who satisfy the plan’s reasonable alternative standard (see Waggoner v. The Carle Foundation, 2:24-CV-02217 (C.D. Ill. Sept. 16, 2025)).
• Another court, however, acknowledged that “full reward” is ambiguous and took the position that rewards need only be provided prospectively (see Williams v. Bally’s Management Group, LLC, No. 1:25-00147-MSM-PAS (D.R.I. Nov. 4, 2025)).

Employers should consult with counsel before adopting a plan that provides employees a reward for less than the entire plan year for completing the alternative standard provided by the plan.

Issue 2: Time to Complete “Reasonable Alternative Standard”

Participants have also challenged via litigation the reasonableness of deadlines for completing the alternative standard.

• One court found that three months to enroll and an additional eight and a half months to complete the program was reasonable (see Chirinian v. Travelers Comps., Inc., 2025 WL 2147271 (D. Minn. July 29, 2025)).
• A magistrate judge recommended that the court find that four months for enrollment in and completion of the program was unreasonable (see Knight v. LHC Grp., Inc., No. 6:25-cv-00263 (W.D. La. Nov. 18, 2025) (Whitehurst, Mag. J.)).

Employers should be cautious about setting overly restrictive deadlines to qualify for relief from the tobacco surcharge.

Issue 3: Notice of Alternative Standard

All plan materials that describe the terms of the wellness program must disclose the availability of a reasonable alternative standard. Litigation challenges related to this disclosure requirement center on two questions:

1. When do plan materials trigger the disclosure requirement?

• By statute, merely mentioning that a program is available, without describing its terms, does not trigger the disclosure requirement;
• The regulatory agencies have concluded that referencing a premium differential (the tobacco surcharge) alone is sufficient to trigger the requirements; and
• At least one court has disagreed, concluding that a reference to the surcharge does not describe the terms of the wellness program but merely mentions its availability (see Williams, supra).

2.    What must be included in the disclosure?

• The rules require the disclosure to state that a physician’s recommendations will be accommodated; courts have rejected the argument that this requirement is outside the bounds of regulatory authority (see Mehlberg, Bokma, and Chirinian, supra);
• Courts have not required that the plan materials disclose what reasonable alternative standard may be used so long as they are clear that an alternative is available (see Waggoner, supra); and
• Use of language that closely mirrors the sample notice in the regulations is sufficient (see Bokma and Waggoner, supra).

Employers should review all plan materials to determine (1) whether such materials describe the terms of the tobacco surcharge and (2) if so, whether the materials include sufficient disclosures.

Issue 4: Breach of Fiduciary Duty

Finally, participants often assert in this litigation that the failure to abide by the nondiscrimination rules constitutes a breach of fiduciary duties. The arguments vary but generally include that the employer has not acted in participants’ interests, has engaged in self-dealing, and/or has failed to act prudently and diligently to ensure the wellness program complied with the law.

Relief for a breach of fiduciary duty is owed to the plan.

• The courts have found that employees cannot state a claim for breach of fiduciary duty when the relief sought by employees, namely reimbursement of improperly collected or retained tobacco surcharges, is owed to the individual participants and not to the plan (see Williams and Chirinian, supra). 
• The courts have allowed claims to move forward when employees assert that the collected surcharges were retained by their employers, for their employers’ benefit, rather than put into the plan (see Mehlberg and Bokma, supra).

Employers should be mindful of their fiduciary duties in administering wellness programs, including their use of amounts collected as tobacco surcharges.

Conclusion

We will continue to monitor developments in the ongoing tobacco surcharge litigation.

For more information about wellness program requirements for your employee benefit plans, please contact Shalina Schaefer, Chris Sears, Tara Sciscoe, Rachel Mattingly Phillips, or the Ice Miller Workplace Solutions lawyer with whom you regularly work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.