Tobacco surcharges have become the focus of class action litigation in recent months. Although corporate wellness programs are commonplace, employers that impose a tobacco surcharge (or other premium discount) in connection with participation in their health plans have been caught up in an onslaught of litigation. The irony is that regulations issued by the U.S. Department of Labor (“DOL”) for health-contingent wellness plans,[1] actually permit a higher surcharge for tobacco usage than for any other health factor. Now, employers who have imposed these surcharges find themselves in costly class action litigation with participants seeking reimbursement for millions of dollars in health premiums.
Tobacco surcharge litigation is surging.
With more than two dozen cases pending in federal courts across the country, wellness plan surcharges are demanding the attention of many employers, including those in the retail, health care, and transportation industries. Among the more well-known employers facing litigation are Macy’s, Walmart, Target, 7-Eleven, PepsiCo, and Campbell Soup Co. In the lawsuits, plaintiffs generally allege that their employers failed to provide a reasonable alternative standard to a smoking cessation program (such as counseling), failed to properly notify employees of such an alternative, failed to provide a full refund of the surcharge for individuals who satisfied the alternative standard, violated ERISA’s anti-discrimination standards by failing to meet the legal requirements of a bona fide wellness program, and/or breached alleged fiduciary duties.
Although most cases involve employees or former employees as plaintiffs, the DOL has initiated litigation as well. In addition to a lawsuit filed against Macy’s back in 2017, which remains pending, the DOL filed a lawsuit against Flying Food Group LLC relating, among other things, to its tobacco surcharge. In September 2023, a consent judgment was entered in the Flying Food case by an Illinois federal district judge, pursuant to which the Company was ordered to reimburse thousands of dollars to employees participating in its health plan who paid tobacco surcharges.
So far most employers are fighting back against the allegations of ERISA violations, including most recently Performance Food Group, which filed a motion to dismiss on November 6, 2024 in the Eastern District of Virginia. However, on the very same day, Bass Pro Shops[2] became the first to file notice of a class action settlement of a tobacco surcharge lawsuit, when it filed its Notice of Settlement in the Western District of Missouri.
A key issue in these cases comes down to the meaning of “adherence” to programs of health promotion and disease prevention.
Although the DOL and class action plaintiffs are heavily focused on the Agencies’ regulations, they are glossing over the statute itself. Specifically, Section 702(b)(1) of ERISA is the non-discrimination provision added to ERISA by HIPAA. It generally provides that “[a] group health plan offering health insurance may not require an individual to pay a premium or contribution which is greater than such premium or contribution for a similarly situated individual enrolled in the plan on the basis of any health-status related factor . . .” However, Section 702(b)(2) then exempts from this general rule a group health plan, which provides discounts or rebates “in return for adherence to programs of health promotion and disease prevention.”
Purporting to interpret this provision, the Agencies’ 2013 regulations (along with an earlier 2007 version) provide that an individual who is not able to satisfy a particular health-contingent wellness program (such as quitting smoking) must be given a reasonable alternative (such as participation in a program to help them stop smoking). According to the Agencies, if plan participants complete such a program, even if they do not adhere to the objective of not smoking, then then they must be eligible for the same reward as those who are tobacco free. The lawsuits filed to date hinge, in part, on the viability of the plaintiffs’ interpretation of the Agencies’ regulations. Many allegations in the filed cases also read into the regulations additional requirements beyond their actual terms.
The viability of surcharge lawsuits may be in jeopardy following the Supreme Court’s decision in Loper Bright.
The Macy’s case is challenging the viability of the Agencies’ regulations governing wellness programs following the U.S. Supreme Court’s June 2024 decision in Loper Bright Enterprises v. Raimondo, which abandoned Chevron[3] deference. Chevron deference had required federal courts to defer to “permissible” agency interpretations of the statutes those agencies administer – even when a reviewing court read the statute differently. In Loper Bright,[4] the U.S. Supreme Court held that courts must exercise their independent judgment in determining whether an agency has acted within its statutory authority, and courts may not defer to an agency interpretation simply because a statute is ambiguous. Recently, the judge in the Macy’s case gave the parties another opportunity to fully brief whether the Agencies’ regulations remain controlling law in the wake of Loper Bright. Macy’s has argued that the regulations are no longer valid. Unsurprisingly, the Secretary of Labor disagrees. If the district court agrees with Macy’s, it could have a domino effect on other pending cases.
What other kinds of surcharges have found their way into the courts?
We are also monitoring litigation against GardaWorld Cash Service Inc.[5], which expands the debate beyond tobacco-related surcharges. In this lawsuit, plaintiffs challenge not only a tobacco surcharge, but also a monthly surcharge for employees who refuse to provide proof of vaccination for COVID-19.
What are the implications of the pending tobacco surcharge class actions on employers?
As employers approach year-end and consider their health insurance plans and related wellness programs, some may assess whether to alter their tobacco surcharge policies. They may be asking themselves, is the risk of a tobacco surcharge worth the reward? Plan design changes may be premature in light of challenges to the viability of the Agencies’ regulations, other arguments that are soon to be raised in motions to dismiss, and potential rollback of regulations by the next administration.
