New Federal Guidance Addresses Employer-Sponsored Wellness Programs

Health care costs remain a significant concern for many small and midsize employers that sponsor health insurance plans. And for good reason — one recent study by professional services firm Aon projected a 9.5% year-over-year increase in these costs in 2027.

One way some organizations address the problem is by implementing a wellness program that encourages employees to engage in healthy behaviors, often through financial incentives offered under their health plans. However, when an insurance premium discount, surcharge or other incentive depends on a participant's health-related activity or outcome, the program must meet federal nondiscrimination rules.

On August 26, the U.S. Departments of Labor, the Treasury, and Health and Human Services issued joint guidance addressing one particularly thorny compliance question: Should a wellness program participant who completes a reasonable alternative standard during the plan year receive a reward retroactively? The answer is especially relevant to plans that impose tobacco-use surcharges and offer a tobacco-cessation program as an alternative to avoiding the surcharge.

Two Buckets

Federal rules separate wellness programs into two buckets:

1. Participatory programs. These don't make an incentive dependent on satisfying a health-related standard. For example, the program may reimburse employees for attending a health education program or using smoking-cessation aids, regardless of whether they actually quit using tobacco.

2. Health-contingent programs. These condition a reward — or the avoidance of a surcharge — on completing an activity tied to a health factor or reaching a specified outcome. For instance, an employer might reward employees for finishing a walking program or charge a higher insurance premium to tobacco users who don't meet the wellness program's requirements. Federal rules place additional conditions on health-contingent programs because an individual's health status can affect qualification.

Generally, health-contingent programs must give eligible participants an opportunity to qualify at least annually and be reasonably designed to promote health or prevent disease. They also need to offer a reasonable alternative standard or, when appropriate, waive the otherwise applicable standard. That way, people who can't meet the initial standard have a feasible route to the reward.

Employers should pay specific attention to how a wellness program is structured. An outcome-based arrangement, such as one that rewards employees for achieving a specified biometric result, must offer a reasonable alternative to anyone who doesn't meet the initial standard. Whereas an activity-only program may need to provide an alternative only if a health condition makes the activity unreasonably difficult or medically inadvisable.

Limits on Incentives

Under federal rules, the total reward for a health-contingent wellness program generally can't exceed 30% of the total cost of the related health insurance coverage. The maximum can rise to 50% for programs designed to prevent or reduce tobacco use. If a class of dependents is eligible to participate, the calculation may need to reflect the cost of the coverage in which the employee and enrolled dependents participate.

A reward may take several forms — including a premium discount, lower cost sharing, an added benefit or the absence of a surcharge. Thus, for these limits, a tobacco surcharge is treated as a wellness incentive.

What the New Guidance Says

Earlier regulatory commentary seemed to indicate that a wellness program participant who completes a reasonable alternative standard partway through a plan year should receive the full reward for the entire year. However, the new guidance recognizes that the regulatory text doesn't clearly require that retroactive result.

Until further guidance or regulations are issued, the federal agencies say they won't take enforcement actions against a plan or issuer that provides the reward only for the period after the participant satisfies the reasonable alternative standard. The plan must otherwise comply with applicable wellness-program requirements, including giving participants enough time to complete the alternative and receive a reward during the plan year.

For a tobacco surcharge, this may mean a plan can stop the surcharge after an employee completes the available cessation alternative without refunding surcharges paid earlier in the year. But the guidance doesn't require that approach. An employer may decide to provide a retroactive or prorated credit if its plan terms and administrative practices allow it.

Required Disclosures Still Matter

The guidance also reinforces a disclosure rule that employers may overlook. Generally, materials describing the terms of a health-contingent wellness program must explain that a reasonable alternative standard or possible surcharge waiver is available. The materials need to provide contact information for obtaining it and state that the program will accommodate recommendations from a participant's personal physician.

In addition, for outcome-based programs, employers must provide such notice in a communication explaining to participants that they didn't meet the initial standard. A brief reference to a wellness program that doesn't describe its terms generally won't trigger this notice requirement.

Financial Impact

The enforcement policy described in the new guidance may reduce the need for retroactive refunds, premium adjustments, and related payroll- or benefits-administration work. However, it's not a blanket safe harbor. The policy addresses only the agencies' enforcement of the retroactivity issue; it doesn't change the underlying program rules or necessarily prevent participant claims or other legal challenges.

If your organization sponsors a wellness program, work with your benefits advisors to review the new guidance and proceed with caution. Before renewing your health plan or changing a wellness incentive, reassess your program's design, incentive calculations, plan documents, enrollment materials and vendor arrangements.

An excessive surcharge, unreasonable alternative, or missing or incomplete notice can lead to correction costs, unhappy participants and compliance exposure. Your payroll and benefits team may need to implement a process (or update its existing one) to apply surcharges or rewards consistently once a participant completes an alternative.

Return on Investment

A well-designed and carefully administered wellness program may support an employer's broader efforts to manage rising health care costs. But, as the new federal guidance makes clear, there are many details to attend to. Your financial advisor can help you quantify all the costs involved and determine whether you're getting an adequate return on investment.