Millions of workers pay more for health coverage because they smoke, vape, or otherwise fail a tobacco-related wellness standard their employer’s plan sets. Federal regulators just settled a 12-year argument over exactly when those workers get their money back if they quit and complete a cessation program partway through the year — and the answer favors employers, at least for now.
The 12-Year Ambiguity Over “Full Reward” Retroactivity
Since 2013, federal wellness-program rules under the Affordable Care Act and HIPAA have required that if an employee doesn’t meet a health-related standard — such as not using tobacco — the plan must offer a “reasonable alternative standard,” commonly a tobacco cessation program, and pay the full reward to anyone who completes it. The rules never clearly answered a basic timing question: if an employee finishes that cessation program in April, does the employer owe the surcharge refund back to January, or only from April forward? The preamble to the 2013 rules suggested the former; the actual regulatory text never said so directly. That gap has sat unresolved for over a decade while employers guessed at their exposure.
The underlying wellness-program rules cap how large a tobacco-related reward can be, but they never eliminated the surcharge itself, which is why it kept showing up as a genuine, sometimes sizable, line item on paychecks and premium statements for smokers and vapers who hadn’t yet completed an alternative program. The question was never whether workers who quit could get the surcharge removed going forward — they always could — but whether they were also owed money back for months they’d already paid before finishing the cessation requirement.
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What the New Guidance Actually Says: Enforcement Relief, Not a Rule Change
On August 26, the Departments of Labor, Health and Human Services, and the Treasury jointly answered the question in FAQ Part 74: the departments will not take enforcement action against a plan that pays the reward only from the point an employee completes the reasonable alternative standard forward, rather than backdating it to the start of the plan year. The guidance is explicit that this is enforcement discretion, exercised because the regulatory text never clearly required retroactive payment even though the preamble implied it — it is not a rewrite of the underlying rule, and plans that prefer to keep paying retroactively remain free to do so. HHS separately encouraged states with primary enforcement authority over insurers to adopt the same approach.
The departments frame this as a stopgap rather than a final answer. FAQ Part 74 is the first guidance the three agencies have issued on these specific wellness-program questions since 2014, and it states plainly that formal rulemaking may still follow to resolve the ambiguity on a permanent basis. Until that happens, employers are operating under a discretionary enforcement posture that a future administration or a future rule could revise, which is a meaningfully different legal footing than a settled regulation.
The Caps Employers Still Have to Respect
The guidance doesn’t touch the dollar limits Congress and regulators already placed on these programs under the Affordable Care Act’s wellness-program framework. Outcome-based wellness rewards generally cannot exceed 30% of the cost of employee-only coverage; for programs specifically designed to reduce tobacco use, that ceiling rises to 50%. A second question the FAQ addresses, separate from timing, concerns disclosure: plans must tell employees about the availability of a reasonable alternative standard in any material that describes the program’s terms, though a document that merely mentions a wellness program exists — without describing how it works — doesn’t trigger that notice requirement.
The Guidance Doesn’t Touch the Bigger Legal Fight Over Surcharges
This clarification lands in the middle of an active legal battle that it does not resolve. Since 2024, employers running tobacco surcharge programs have faced a wave of class-action lawsuits arguing the surcharges themselves violate ERISA’s health-status nondiscrimination protections — a different legal question than when a refund is owed. Some of those cases have already settled; trade reporting on the guidance notes that benefits law firms have documented Bass Pro Shops among the employers that reached a settlement. Others have gone the employer’s way in court: a federal judge in Rhode Island granted a motion to dismiss in a case against Bally Management Group, the first court in this litigation wave to do so, though other suits remain active elsewhere. FAQ Part 74 narrows one compliance question for employers; it says nothing about whether tobacco surcharges as a category survive the broader nondiscrimination challenge. Plaintiffs in the active cases argue that charging more for coverage based on tobacco use is itself a form of health-status discrimination barred by ERISA, regardless of how promptly any refund is calculated — a claim this guidance does not address one way or the other.
What It Means for a Worker Paying a Tobacco Surcharge
For an employee currently paying a tobacco-related premium surcharge, the practical takeaway is about timing rather than eligibility. Completing a cessation program mid-year still entitles a worker to the full reward — meaning the surcharge should stop — but this guidance means an employer is no longer at legal risk under federal enforcement for declining to also refund the months already charged before the program was completed. Workers who believe they’ve already qualified for a reward and haven’t seen it applied should check their plan’s own written terms, since some employers may still choose to backdate as a matter of plan design even though nothing in this guidance requires it, and the disclosure rules mean the plan’s own materials should spell out how to request the alternative standard in the first place.
This article was produced with AI assistance and reviewed by a human editor. Figures are linked to their primary sources; where a claim could not be verified from the public record, we say so.
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