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ARTICLES / JUNE 4, 2026
Where there’s smoke: How plan sponsors can guard against tobacco surcharge litigation
8 MIN READ
For organizations that offer wellness programs to their workforce, there’s been increased scrutiny over how employees who smoke or use other tobacco products are treated under those programs.
Tobacco surcharges – which impose higher premiums on employees who are tobacco users – are a common tactic among wellness programs to help incentivize healthier lifestyles for employees and reign in healthcare costs.
These surcharges have become the target of litigation in recent years. In 2025 alone, plaintiffs filed more than 50 class action lawsuits challenging the legality of tobacco surcharges. Some of the complaints portray tobacco surcharges as unfairly penalizing employees who struggle with addiction. Plan sponsors have responded by insisting the surcharges help curb smoking and reduce plan costs down the road.
Court rulings have come down on either side of this issue, but several of the lawsuits have settled with employers shelling out millions of dollars in retroactive surcharges and modifying their wellness programs. Plaintiffs’ lawyers continue to seek wellness plans that show warning signs of non-compliance, assuming that where there’s smoke, there’s fire.
With that in mind, employers should consider the risk of litigation over tobacco surcharges and take steps to ensure that their wellness programs comply with ERISA fiduciary duties and meet HIPAA nondiscrimination requirements.
Why are tobacco surcharges being challenged?
Under HIPAA, group health plans must not discriminate due to health factors, which include tobacco use. There are, however, exceptions that include wellness programs offering rewards like reduced premium contributions for tobacco users who take steps to quit the habit. Employers are permitted to impose surcharges of as much as 50% of the total premium costs for wellness programs, though most plan sponsors charge tobacco users far less than that.
Still, plaintiff lawyers have recently targeted wellness programs that allegedly do not sufficiently comply with all the regulations. Some lawsuits focus on the amount of premium refunds, and others claim that wellness plans failed to notify participants of a reasonable alternative standard (RAS) as required under the law.
Additionally, the Department of Labor (DOL) has traditionally reviewed wellness programs for HIPAA compliance.
Well-run plans must aim to minimize litigation risks and prepare for DOL scrutiny. Employers should also take steps to ensure participant communication is clear in both plan documents and communications that go out to participants.
Understanding how to do that requires plan sponsors to drill down further into the wellness program playbook.
Navigating the regulatory landscape for surcharges
Wellness and disease-management programs are subject to a web of federal laws, including ERISA, HIPAA, the Americans with Disabilities Act (ADA), the Genetic Information Nondiscrimination Act (GINA), COBRA, and the Internal Revenue Code. Each law has unique requirements regarding who can participate, what information can be collected, how incentives are provided, and what rights employees and their families have.
Tobacco surcharges are mostly outcome-based wellness programs and, while allowed, they must meet a robust HIPAA standard. To comply with regulatory requirements and be considered nondiscriminatory under HIPAA, plans must follow these rules:
Be reasonably designed to promote health or prevent disease.
Offer participants the opportunity to qualify for the reward at least once each year.
The “full reward” must be available to all similarly situated participants. They must offer a reasonable alternative standard (RAS) to individuals who do not meet the initial standard to obtain the reward. For example, if the initial standard is to not use tobacco, then the plan must offer a standard like completing a tobacco cessation class. The plan must provide the same, full reward regardless of whether the participant was a non-smoker or took the educational class.
Disclose in all plan materials describing the terms of the wellness program and the availability of the RAS. Where required, the notice must include contact information for obtaining the RAS and a statement that any recommendation of an individual’s personal physician will be accommodated.
Plan sponsors that neglect these ground rules run the risk of attracting litigation. But not all class action lawsuits over tobacco surcharges make the exact same allegations, nor have they had the same outcomes.
What the plaintiffs allege
Most tobacco surcharge lawsuits allege that employer-imposed surcharges violate the HIPAA non-discrimination provision. Specifically, the plans charged monthly premium surcharges to participants who identified themselves as tobacco users.
Below are three of the most common allegations from plaintiffs, and what plan sponsors can do to proactively avoid these scenarios:
Allegation #1: The plan doesn’t offer a RAS because the premium reductions are only available on a prospective basis. Some lawsuits allege that employees were eligible to have the tobacco surcharge removed upon completing a tobacco cessation program, but the adjustments to the premium charged were only made on a prospective basis. The argument is that only offering a prospective adjustment to the premium surcharge violates the regulatory requirement that the “full reward” be made available to individuals who satisfy the RAS.
What plan sponsors can do: The best practice is to offer rewards (such as premium reductions) on both a prospective and retroactive basis. This ensures the “full reward” is provided to individuals who satisfy the RAS.
Allegation #2: The plan doesn’t communicate the existence of such alternatives in “all plan materials.” Some argue that a plan’s annual enrollment guide asked whether they are a tobacco user and, if so, whether the employee is willing to participate in a tobacco cessation program. Where things become problematic is if the enrollment guide does not explain the tobacco premium surcharge or how an employee can avoid the surcharge through an RAS.
What plan sponsors can do: Ensure that annual enrollment guides adequately discuss the tobacco premium surcharge or the process for avoiding it through RAS. One way to address this is by clearly explaining an available tobacco cessation program.
Allegation #3: Employers’ collection of the surcharge is a fiduciary duty breach. Some lawsuits maintain that, by collecting the surcharge, the employers reduced the amount that they contributed toward the funding of the self-funded plan’s claims and administrative expenses, which benefited the employers and harmed the plan.
What plan sponsors can do: Employers should remember their fiduciary duties and how they use the amounts collected by surcharge. Be sure to properly allocate the surcharge amounts toward paying claims and administrative expenses. Do not retain the surcharge amounts for the employer’s benefit.
In short, the best defense is a good offense. For plan sponsors who do find themselves mired in litigation, they can take some solace that some of the most recent court rulings have been in the wellness plans’ favor.
A mixed bag of rulings
While the first wave of lawsuit decisions and settlements favored the plaintiffs, more recent court decisions have favored the plan sponsors. A federal district court in Rhode Island ruled in November 2025 that a plan was not legally required to retroactively reimburse the tobacco penalties paid by workers who later completed a smoking cessation class.
A handful of lower-level federal district courts have ruled similarly. In February, a district court in Missouri ruled that the employer was permitted to offer premium discounts only on a prospective basis. More recently, a district court in New York held that an employer offered “full reward” when completion of a tobacco cessation course exempted them from surcharges for the following plan year. Finally, an Ohio district court determined in March that ERISA does not require employers to retroactively reimburse participants for surcharges paid before completing a tobacco cessation course.
In the meantime, new cases are regularly emerging that focus on whether employers must retroactively reimburse premium surcharges upon completion of wellness requirements. These most recent rulings have not viewed tobacco surcharge collection as a fiduciary breach. This is welcome news for plans since there have been an increasing number of fiduciary breach cases in the pharmacy benefit manager (PBM) space.
What employers can do now
While employers have chalked up a few recent wins in tobacco surcharge cases, the preference is not be accused of a regulatory violation at all. To avoid the risk of scrutiny from a plaintiff or the DOL, plan sponsors should take the following steps:
Get back to the fundamentals. Review wellness programs to confirm that they fully comply with the HIPAA wellness program requirements.
Double-check communications, particularly with activity-based or outcome-based programs that have more stringent requirements.
Stay informed and keep a trusted compliance advisor on speed-dial. The plaintiff’s bar will continue filing lawsuits and the outcomes are anyone’s guess.