The Fine Line Between ERISA Wellness Incentives and Penalties

by Rrita Osmani and Cameron Smith

Even wellness programs with good intentions can violate the Employee Retirement Income Security Act (“ERISA”) if incentives cross the line into coercive penalties. As employers increasingly use weight loss challenges, step goals, or health screenings to promote wellness, questions arise about whether these programs comply with ERISA, the Affordable Care Act (“ACA”), and the Health Insurance Portability and Accountability Act (“HIPAA”) nondiscrimination rules. Miller Shah LLP advises employers, plan administrators, and employees on ERISA compliance and represents workers whose benefits have been unfairly reduced or penalized by improperly structured wellness programs.

 How Do Wellness Programs Provide Financial Incentives?

A wellness program is an employer-sponsored program that educates employees about health-related issues, promotes healthy lifestyles, or encourages employees to make healthier choices. Programs can be tied to financial incentives that may take the form of reductions in health care premiums, reductions in co-pays, or sometimes payments of cash or cash equivalents, like gift cards. The Affordable Care Act divides wellness programs into two categories: (1) participatory and (2) health contingent.

Participatory Wellness Programs

In participatory wellness programs, the group health plan provides individuals with a wellness incentive to participate in the program without requiring that the employee satisfy any health-related condition to receive the incentives. Some examples of participatory programs include:

• Programs that reimburse employees for membership in a fitness center.

• Programs that provide rewards to employees for attending a health education seminar.

Health-Contingent Wellness Programs

In health-contingent programs, the group health plan provides individuals with a financial incentive to satisfy a standard related to a health factor. Some health-contingent programs are activity-only, meaning individuals must perform or complete an activity related to a health factor to obtain the reward. Examples of these activities can be walking, dieting, or exercise programs. Other health-contingent programs are outcome-based, which requires an individual to attain or maintain a specific health outcome to receive a reward, such as not smoking or reaching certain results in biometric screenings.

What Requirements Must Wellness Incentives and Programs Meet Under ERISA?

An employer’s wellness program will be subject to ERISA’s provisions if the program provides medical care rather than just educational information or access to health care facilities. Medical care is defined as any care related to the diagnosis, treatment, or prevention of a health condition. Health-contingent plans are typically covered by ERISA.

The ACA and HIPAA generally prohibit group health plans from charging similarly situated individuals different premiums or contributions. However, one exception allows plans to offer financial incentives associated with wellness programs. The ACA amended Section 702 of ERISA to include anti-discrimination provisions for wellness programs. Under these provisions, the group health plan must meet five requirements:

1. The reward for the wellness program, together with the reward for other health contingent programs, must not exceed 30 percent of the total cost of employee-only coverage under the plan.
2. The wellness program shall be reasonably designed to promote health and/or prevent disease.
3. The health care plan shall give individuals eligible for the program the opportunity to qualify for the reward at least once each year.
4. The wellness program must allow for a reasonably alternative standard to individuals for whom it is either unreasonably difficult due to a medical condition to satisfy the otherwise applicable standard or medically inadvisable to attempt to satisfy the otherwise applicable standard
5. Employers must disclose in all plan materials the availability of a reasonably alternative standard and the terms surrounding it.

 A Wellness Reward or a Coercive Penalty?

Coercion in wellness programs refers to the use of pressure to influence an individual’s participation in an activity. Programs that unfairly penalize employees who don’t participate or meet specific health goals may be coercive if they use financial pressure to indirectly or directly influence employees to participate.

The ACA recognizes any reward greater than 30 percent of the total cost of employee-only coverage as a coercive penalty that may influence an individual’s decision to participate in the program. Furthermore, ERISA, the ACA, and HIPAA (collectively, the “Acts”) recognize that every employee may not be similarly situated to participate in an activity or attain/maintain a certain health status. Accordingly, the Acts mandate that employees have a reasonable alternative standard and refrain from penalizing individuals based on factors that are outside of their control. If an employer fails to fully disclose that employees can be exempt from a program or activity based on medical condition or medical advice, that practice may be seen as coercive.

Common Pitfalls in Wellness Programs

Employers should take into account different factors that may relate to an employee’s ability to meet a threshold in an outcome-based program. Workers with lower incomes, for example, may face additional barriers to achieving a targeted health outcome, such as a lower cholesterol level, due to lack of access to affordable and nutritious food. This can exasperate inequities in the workplace if people with lower incomes are paying more for healthcare compared to their counterparts with higher incomes. Employers should take all of these aspects into account when designing a wellness program.

When employers fully disclose reasonable alternatives, they may find that wellness programs have higher participation rates and better health outcomes. Some employees are unaware of the other alternatives and therefore opt out of programs without exploring other options. By fully disclosing alternative standards, employers and employees can get the most out of wellness programs.

Miller Shah Can Help

Employers have a duty under ERISA to comply with ERISA and other federal and state laws in the design and implementation of wellness programs. Employees have a right to fair health care premiums and properly structured wellness programs. Both employers and employees must understand and be able to apply the standards in ERISA.

Miller Shah can help. Our attorneys have extensive experience guiding employers and plan administrators in compliance and representing employees whose benefits have been unfairly reduced.

If you have any questions surrounding wellness programs covered by ERISA, contact Miller Shah online or call 866-540-5505 to arrange a consultation.