Tobacco surcharge programs have spent the last two years defending class action lawsuits. Federal regulators have now stepped in with guidance that gives those programs clearer footing, though it does not end the underlying legal exposure.
The Departments of Labor, Health and Human Services (HHS), and Treasury jointly issued FAQ Part 74, a guidance document addressing two interpretive questions about health-contingent wellness programs under the Affordable Care Act (ACA) and the Health Insurance Portability and Accountability Act (HIPAA). It is the first guidance the three agencies have issued on these specific questions since 2014. It arrives as class action litigation targeting employer tobacco surcharge programs has accelerated.
Benefits law firms, including Vedder Price and Husch Blackwell, have documented a surge in suits challenging tobacco surcharges on ERISA nondiscrimination grounds. Bass Pro Shops is among the employers that settled, according to Vedder Price. Other cases remain active.
FAQ Part 74 resolves a 12-year interpretive gap left by the 2013 final rules on health-contingent wellness programs. Under those rules, outcome-based programs, which require employees to attain or maintain a specific health outcome to earn a reward, must make the full reward available to all similarly situated individuals.
For tobacco programs, that reward cap is 50 percent of the cost of employee-only coverage under the plan. Where an employee does not meet the initial standard, the plan must offer a reasonable alternative standard, which in practice is often the option to complete a tobacco cessation program.
The 2013 preamble stated something the regulatory text did not clearly require: that if an employee completes the reasonable alternative standard partway through the plan year, the plan must pay the full reward retroactively to January 1. That created a concrete compliance question. If an employee completes a cessation program in April, does the employer owe the waived tobacco surcharge for January, February, and March as well?
FAQ Part 74 answers by exercising enforcement discretion. The departments say they will not take action against a plan that provides the reward only from the point the employee satisfies the alternative standard going forward, rather than back to the start of the plan year. The regulatory text did not clearly require retroactive payment, the guidance acknowledges, and the departments are declining to enforce the preamble's stricter reading while rulemaking is assessed. Plans that choose to continue paying retroactively remain free to do so.
The FAQ also addresses which plan materials must include the notice about the availability of a reasonable alternative standard. Under the 2013 rules, that notice must appear in all materials describing the terms of a health-contingent program, and in any notice telling an employee they did not satisfy the initial standard. Materials that only mention a program exists, without describing its terms, do not trigger the full disclosure requirement.
The guidance lands against an active litigation backdrop. Since 2024, employers running tobacco surcharge programs have faced an accelerating wave of class action suits arguing those programs violate ERISA's health-status nondiscrimination rules. Plaintiffs have argued that the surcharge itself discriminates against tobacco users as a health-status-related factor.
Courts have returned mixed results. The US District Court for the District of Rhode Island granted a motion to dismiss in Williams v. Bally Management Group, LLC, the first court in this litigation wave to do so. Cases against other employers continue. Multiple law firm analyses from late 2025 note the litigation shows no sign of slowing. The ERISA litigation surge putting plan sponsors on defense predates the wellness guidance and is not resolved by it.
FAQ Part 74 does not address those nondiscrimination challenges directly. It addresses the narrower question of when the reward must be paid, not whether the surcharge itself is permissible under ERISA. Benefits brokers advising employer clients should make that distinction explicit: the enforcement discretion on retroactivity reduces one compliance risk; it does not reduce the litigation risk that the surcharge program itself may face.
FAQ Part 74 gives benefits brokers three concrete checks before the next open enrollment cycle. The first is whether wellness plan documents describe clearly when and how rewards are applied, whether retroactively or prospectively, and whether that description matches what the plan actually does. Inconsistency between document language and practice has been a recurring issue in the class action suits, where plaintiffs have used plan terms as evidence of non-compliance.
The second is whether the reasonable alternative standard notice appears in every plan material describing the program's terms. A benefits broker reviewing wellness program communications can now use the FAQ's Q2 language as the governing standard: the notice is required wherever terms are described, not wherever the program's existence is mentioned.
The third is whether the plan's reward structure stays within the ACA-permitted caps: 30 percent of employee-only premium cost for health-contingent programs generally, and 50 percent for programs specifically designed to prevent or reduce tobacco use.
Rulemaking is expected to follow the guidance. Until the departments revise the regulation, plans running tobacco surcharge programs operate under enforcement discretion rather than a clear regulatory rule. That is a reason for brokers to document current practice carefully and flag the outstanding legal risk to employer clients before they treat FAQ Part 74 as a clean bill of compliance. The broader ERISA compliance questions that are reaching group health plans make that conversation worth having at every renewal table, not just for employers with active wellness programs.
