Tri-Agency Guidance Addresses Requirements for Tobacco Surcharge Programs

On August 26, 2026, the US Departments of Labor, Health and Human Services, and Treasury (collectively, the “Departments”), issued important new guidance for plan sponsors addressing health-contingent wellness programs titled “FAQs About Affordable Care Act and Health Insurance Portability and Accountability Act Implementation Part 74” (“2026 FAQs”). In response to the ongoing wave of tobacco surcharge lawsuits, the Departments issued the 2026 FAQs to address whether a health-contingent wellness program,¹ like a tobacco surcharge program, must retroactively reimburse a participant for the entire plan year when a participant satisfies a reasonable alternative standard (such as completing a tobacco cessation program) in the middle of the plan year. For example, if a participant completes a tobacco cessation program in June, the 2026 FAQs address whether in the Departments’ view the plan sponsor needs to reimburse the participant for tobacco surcharges paid from January to May. The answer to that question is “no”; in the Departments’ view, they do not have to do so.

The regulations governing health-contingent wellness programs were last revised in 2013 (“2013 Regulations”).² While the 2026 FAQs do not amend the governing regulations, they confirm the Departments’ interpretation that the 2013 Regulations do not “clearly require retroactive application of the reward.” The Departments explain that they will exercise their enforcement discretion and not take any enforcement action against plan sponsors that do not retroactively reimburse participants who satisfy a reasonable alternative standard mid-year, so long as they “provide[] the reward corresponding to the period after the reasonable alternative standard is satisfied…and otherwise compl[y]” with applicable wellness program rules. The 2026 FAQs also provide much-needed guidance on when participant-facing plan materials referencing a wellness program must disclose the availability of a reasonable alternative standard.

Requirements for Outcome-Based Wellness Programs Under ERISA

Under the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended by the Health Insurance Portability and Accountability Act (“HIPAA”), the Public Health Service Act (“PHSA”), and the Patient Protection and Affordable Care Act (“ACA”), employer-sponsored group health plans generally may not discriminate against participants based on any health status-related factor, including tobacco use. However, ERISA permits group health plans to offer premium discounts or impose surcharges through health-contingent wellness programs, provided the program satisfies certain regulatory conditions set forth in 29 C.F.R. § 2590.702(f)(4):

1. The program must give eligible individuals an opportunity to qualify for the reward (including elimination of the surcharge) at least once per year.
2. The reward (or surcharge) for all health-contingent wellness programs under the plan may not exceed the applicable percentage of the total cost of employee-only coverage—generally 30%, or up to 50% for programs designed to prevent or reduce tobacco use.
3. The program must be reasonably designed to promote health or prevent disease.
4. The full reward must be available to all similarly situated individuals. The plan must offer a reasonable alternative standard (or waiver of the otherwise applicable standard) for obtaining the reward to any individual who does not meet the initial standard based on the measurement, test, or screening.
5. All plan materials describing the terms of the wellness program must disclose the availability of a reasonable alternative standard (or waiver of the otherwise applicable standard), including contact information and a statement that the plan will accommodate recommendations of the participant’s personal physician. This disclosure is not required in plan materials that merely mention that such a wellness program is available, without describing its terms.

The 2026 FAQs focus on the fourth (“full reward”) and fifth (“disclosure”) conditions, which are the primary focus of the pending tobacco surcharge lawsuits.

FAQ 1: Departments’ Interpretation of the “Full Reward” Requirement

First, the Departments address the “full reward” requirement (29 C.F.R. § 2590.702(f)(4)(iv)) and specifically acknowledge that the preamble to the 2013 Regulations and the text of the actual regulations differ in their requirements. The preamble to the 2013 Regulations included an example suggesting that, if a participant were to satisfy the reasonable alternative standard (such as a tobacco cessation program) on April 1, he or she would be entitled to the full reward (i.e., surcharge-free premiums) retroactive to the beginning of the plan year. In the 2026 FAQs, the Departments explain that this preamble interpretation was not incorporated into the actual 2013 Regulations, which do not “clearly require retroactive application of the reward.”

Given the disparity between the preamble language and regulatory text, the Departments explain in FAQ 1 that they will exercise their “enforcement discretion” and not take any enforcement action against a plan or plan sponsor that does not provide retroactive reimbursement, so long as the plan “provide[s] the reward corresponding to the period after the reasonable alternative standard is satisfied…” and otherwise complies with all applicable wellness program requirements.

In addition to contradicting the ERISA plaintiffs’ bar’s contention that ERISA’s wellness program requirements mandate retroactive reimbursement, the 2026 FAQs reverse the position previously advanced by the DOL in at least two prior enforcement actions.³ In so doing, the 2026 FAQs affirm the Departments’ 2014 joint guidance titled “FAQs about Affordable Care Act Implementation (Part XVIII) and Mental Health Parity Implementation” (“2014 FAQs”). Addressing tobacco surcharge programs, the 2014 FAQs clarified that plan sponsors may—but are not required to—offer pro-rated rewards for mid-year enrollment in and completion of a wellness program. The 2014 FAQs also confirmed that plan sponsors are not required to offer participants the opportunity to enroll in a wellness program mid-year, so long as the program allows participants to enroll in a reasonable alternative standard (like a tobacco cessation program) and qualify for the reward at the time of enrollment or annual re-enrollment.

FAQ 2: Disclosure of Availability of Reasonable Alternative Standard in Plan Materials

Second, the Departments address the regulatory requirement for plan sponsors to disclose in “all plan materials describing the terms of an outcome-based wellness program” the availability of a reasonable alternative standard (including information on how to obtain one, and a statement that the plan will accommodate recommendations of the participant’s personal physician with respect to the reasonable alternative standard). 29 C.F.R. § 2590.702(f)(4)(v) (emphasis added).

While the 2013 Regulations included several examples of a compliant disclosure, until now, the Departments had not provided any specific guidance on the difference between a disclosure that “merely mentions” the availability of a health-contingent wellness program (and thus does not need to contain the regulatory disclosure), and one that describes the program’s terms (triggering the disclosure requirement). Seeking to take advantage of this lack of guidance, a growing number of ERISA plaintiffs’ firms have argued in tobacco surcharge lawsuits that the lack of the full disclosure in even a single participant-facing plan material invalidates the entire wellness program, even if other materials contain fulsome disclosures.

The Departments clarify in the 2026 FAQs that plan materials (such as summaries of benefits and coverage) that merely “note[ ] that cost sharing may vary based on participation” would not trigger the regulatory disclosure requirements, so long as those materials do not describe the actual standards of the program. While FAQ 2 provides a general framework for plan sponsors to evaluate when disclosure of a reasonable alternative standard is required, some questions remain. Namely, the guidance does not address when a document may be considered to “describ[e] the standards of the program,” so as to trigger disclosure requirements.

Tobacco Surcharge Litigation

The 2026 FAQs come amidst a wave of ERISA litigation challenging tobacco surcharge programs. Starting in 2024, ERISA plaintiffs’ firms began filing dozens of class action lawsuits across the country seeking to invalidate tobacco surcharge programs that allegedly failed to comply with the 2013 Regulations’ technical requirements. In these lawsuits, the plaintiffs alleged, among other things, that the 2013 Regulations mandate retroactive reimbursement and that the regulatory disclosures must be included in their entirety in all participant-facing plan materials that mention the program. While district courts to date have reached different conclusions on the validity of these claims (and the applicable statutory and regulatory requirements), they have often looked to the Departments’ regulations and guidance in evaluating the sufficiency of the plaintiffs’ claims.

In addition to providing plan sponsors with much needed guidance, the 2026 FAQs provide additional support for their litigation defenses. For plan sponsors facing tobacco surcharge lawsuits, the 2026 FAQs support the argument that neither ERISA nor the 2013 Regulations require retroactive reimbursement of paid tobacco surcharges. They also support the plan sponsor argument that documents that simply mention a wellness program are not required to include all of the applicable regulatory disclosures.

Practical Implications for Plan Sponsors

The 2026 FAQs are a good reminder that employers that offer group health plans with tobacco surcharges should take a fresh look at their wellness programs to ensure that their implementation and administration of the programs complies with the terms of their plan. They should also evaluate their programs in light of the 2026 FAQs and recent developments in the ongoing wave of tobacco surcharge lawsuits to identify areas of potential litigation or compliance risk.

On the disclosure side, employers should review their plan materials and participant communications to ensure their description of their wellness program satisfies the regulatory disclosure requirements, including a statement that the plan will accommodate the recommendations of a participant’s personal physician with respect to that participant’s satisfaction of a reasonable alternative standard.

¹ Health-contingent wellness programs are commonly referred to as “outcome-based wellness programs.”

² The 2013 Regulations are codified at 29 C.F.R. § 2590.702(f)(4).

³ As recently as 2023, the DOL advanced arguments in enforcement litigation that prospective-only relief did not satisfy the health-contingent wellness program requirements, taking the position that such provision would allow plans to discriminate for a portion of the plan year. See, e.g., Sec’y of Lab. v. Flying Food Group, LLC, No. 1:23-cv-06583 (N.D. Ill.); Sec’y of Lab. v. Macy’s Inc., 1:17-cv-541 (S.D. Ohio).