Many employers have capitalized on the wellness program trend in order to help eliminate skyrocketing health plan costs and decrease absenteeism and so-called “presenteeism.” While many of these programs have been around for some time, there have been significant legal developments that require employers to now take a serious look at their program’s legal compliance. New regulations issued by the Departments of Labor, Treasury and Health & Human Services require plan sponsors to modify wellness programs for plan years beginning on or after January 1, 2014.
Most significantly, the new maximum reward (such as lower contributions, reductions in cost-sharing or the avoidance of a premium surcharge) that may be tied to participation in a wellness program has increased from 20% to 30% of the total cost of coverage for non-tobacco wellness programs with an additional 20% that may be allocated to wellness programs designed to reduce tobacco usage. There are additional changes to requirements on providing reasonable alternatives to plan participants, providing notice of those alternatives and seeking medical verification of the need for a reasonable alternative.
Types of Wellness Programs
Earlier regulations differentiated between participatory programs (where an individual is rewarded by simply participating in the program without an obligation to meet any health standard) and health-contingent programs (where rewards are based on meeting certain health requirements such as body mass index, cholesterol levels, etc.).
Participatory programs, which include reimbursing fitness center costs, providing a reward for completing an HRA and reimbursing fees for smoking cessation programs (regardless of whether the individual actually quits using tobacco), do not require compliance with the multi-factored approach set forth under the HIPAA nondiscrimination requirements. Plan sponsors should keep in mind, however, that any reward must be available to all similarly situated individuals and that there are often personal income tax implications for rewards connected to participatory programs.
The rules are more complicated for health-contingent programs that tie a reward to attaining or maintaining a health standard. Health-contingent programs must meet the following five requirements:
Individuals must be provided with an opportunity to qualify for a reward at least once per year.
The maximum potential reward is capped at 30% of the total cost of coverage, with an additional 20% that may be applied for tobacco-cessation programs (up to 50% total). The total cost of coverage is the sum of employer and employee contributions to the health plan, which is usually the COBRA rate, minus the 2% administrative fee.
If an employee’s dependents are also eligible to participate in the program, the total cost of coverage is assessed on the value of the category in which the employee and any dependents are enrolled (e.g., employee plus one or family coverage).
The program must be designed to promote health and prevent disease, must not be overly burdensome and must not be a subterfuge for discriminating on a health factor.
The reward has to be available to all similarly situated individuals and must provide for a reasonable alternative or waiver in certain situations. The cost of the reasonable alternative must be paid for in total by the plan sponsor. What constitutes a reasonable alternative will differ depending on the facts and circumstances of a particular program.
The plan must provide notice of the availability of the reasonable alternative standard (or a waiver, if applicable) in any plan materials describing the reward.
Plan sponsors familiar with wellness programs will notice that these rules are a bit different from those in place since 2006. More importantly, the new regulations further divide health-contingent programs into activity-only programs and outcome-based programs with very different obligations.
Activity-only programs require that an individual perform or complete an activity related to a health factor in order to obtain a reward. They do not require that the individual attain or maintain a specific health outcome. Examples would include walking, diet or exercise programs that do not actually require the participating individual to lose weight. Activity-only programs must provide a reasonable alternative to the required activity when it is unreasonably difficult or medically inadvisable for a participant to satisfy the standard because of a medical condition. For example, if an individual is recovering from a hip replacement, it may be medically inadvisable to embark on an exercise program until sufficient healing has occurred. The plan sponsor can seek clarification from an individual’s physician to verify whether it would be unreasonably difficult or medically inadvisable to meet the standard.
Outcome-based programs require an individual to maintain or attain a specific health outcome in order to obtain a reward. They are generally designed as two-tier systems. First, the individual is measured, tested or screened for specific health factors. Then, individuals who do not meet the standard are required to complete wellness activities in order to obtain a reward.
Unlike activity-based programs, outcome-based programs cannot require verification from the individual’s physician that meeting the target is unreasonably difficult before offering an alternative standard. An alternative standard must be freely available to anyone, and the plan sponsor must provide adequate time for individuals to meet the alternative. In some situations, an “alternative to the alternative” may be required if the alternative itself is too difficult or medically inadvisable to attempt. In that situation, an individual is entitled to request his or her physician’s input on the development of a second alternative and this should be mentioned in plan materials describing the program. Plan sponsors are generally required to work with the physician in implementing a reasonable alternative.
Outcome-based programs must allow for a cycle of repeated failure and renewed effort, and must have appeal and external review processes in place relating to denial of benefits. Complicated rules also exist on providing retroactive or pro-rated reward payments, especially if the program is tied to a cafeteria plan.
What’s the penalty for noncompliance?
Under Health Care Reform, noncompliant wellness programs are potentially subject to penalties of up to $100 per participant per day. The Department of Labor may also audit programs and impose additional penalties under ERISA, the Americans with Disabilities Act, Title VII, the Pregnancy Discrimination Act and the Age Discrimination and Employment Act. The penalties for noncompliant programs can be staggering, and leave an employer open to significant potential litigation.
What should we do now?
We expect to receive future guidance on how and when plan sponsors may verify medical limitations regarding reasonable alternative standards and what actions, if any, a plan sponsor can take to rescind coverage in connection with false or materially misleading statements about tobacco use or other health factors. There is a great deal of flexibility in the design and implementation of wellness programs, but plan sponsors need assistance from competent legal counsel in reviewing the program’s parameters to avoid potential compliance problems before the new regulations take effect.