Wellness Programs Giving Employers a Workout
Wellness programs, designed to promote health or prevent disease with the intention of reducing overall healthcare costs, are gaining in popularity as an approach to curb rising healthcare premiums. In offering these programs, employers have already had to comply with multiple laws which are regulated by multiple government agencies. Now, employers will have to comply with additional regulations issued by yet one more government agency. These new regulations are anticipated to become effective as of the first day of the first plan year that begins on or after January 1, 2017.
While it is challenging enough to comply with numerous laws in the design and implementation of wellness programs, the toughest exercise will be reconciling the inconsistencies of the regulations between the various government agencies involved.
Understanding Wellness Programs
Wellness programs typically encourage healthier lifestyles through daily exercise, healthy diet, stress reduction, and smoking cessation, and often involve the gathering of medical information through the completion of a health risk assessment (HRA) and/or a screening for health risk factors. Most programs offer incentives to employees who participate or achieve particular health-related outcomes. A wellness program can be offered as a component of an employer’s group health plan, or as a stand-alone program.
There are two types of wellness programs: Participatory Programs and Health-Contingent Programs.
A wellness program is participatory if none of the conditions for obtaining a reward under the program is based on any individual satisfying a standard that is related to a health factor (or if the program does not provide any reward). As the name suggests, mere participation in the program is sufficient, without regard to any results that may or may not be achieved. Examples of rewarded activities in participatory programs include:
- attending a health education seminar
- participating in an HRA (with no further action required by the employee with respect to any health issues identified via the HRA)
- attending a smoking cessation program (without regard to whether the employee actually quits smoking)
- gym membership reimbursement
Health Contingent Programs
A health-contingent program, on the other hand, requires participants to satisfy a standard related to a health factor to obtain a reward, or the program requires the participant to do more than a similarly-situated individual to obtain the same reward. A health-contingent program may be “activity-only” or “outcome-based.” An activity-only program is one that requires a participant to perform or complete an activity related to a health factor to obtain a reward, but does not require the participant to attain or maintain any particular outcome. Examples include participation in walking, dieting or exercise programs. An outcome-based program is one that requires the participant to attain or maintain a specific health-related outcome to obtain a reward. Examples include smoking cessation or attaining particular results in a biometric screening (e.g., lowering the participant’s blood pressure by a specified percentage).
The Foundation of Wellness Programs: HIPAA and the ACA
The cornerstone of the laws governing wellness programs is the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Generally, HIPAA prohibits group health plans from discriminating with respect to premiums or cost-sharing based on health-related factors. Regulations issued jointly by the Department of Labor, the Internal Revenue Service and the Department of Health and Human Services (sometimes referred to as the Tri-Agencies) in 2006 provided for an exception to the HIPAA nondiscrimination rules for wellness programs, provided that certain conditions were met. The Patient Protection and Affordable Care Act of 2010 (ACA) codified the regulations into law, with minor changes. New regulations were then issued by the Tri-Agencies in 2013.
Participatory wellness programs are permissible under the HIPAA/ACA nondiscrimination rules, without any additional standards or limits, provided that they are made available to all similarly-situated individuals.
Health-contingent wellness programs are subject to the following five requirements:
- All individuals must be given the opportunity to qualify for any reward offered under the program at least once per year.
- The total reward offered to an individual under all health-contingent wellness programs cannot exceed 30% of the total cost of employee-only coverage under the plan (including both employer and employee contributions toward the cost of coverage), or 50% to the extent that the additional percentage is attributed to prevention or reduction of tobacco use.
- The program must be reasonably designed to promote health or prevent disease.
- The full reward must be available to all similarly-situated individuals. The application of this requirement depends on the type of the health-contingent wellness program. An activity-only program must allow for a reasonable alternative (or waive the requirement) in order to obtain the reward for any individual for whom the standard is unreasonably difficult due to a medical condition or for whom an attempt to meet the standard is medically inadvisable. An outcome-based program must allow for a reasonable alternative standard (or waive the requirement) in order to obtain the reward for any individual who does not meet the initial standard based on a measurement, test or screening.
- Health plans and insurance issuers must disclose the availability of any reasonable alternative. Model language meeting the requirements is available from the DOL at https://www.dol.gov/ebsa/pdf/cagappc.pdf.
The New Additional Compliance Requirements: The EEOC Enforces ADA and GINA Regulations
The Equal Employment Opportunity Commission (EEOC) is the primary agency charged with enforcing the ADA, and issued its own proposed regulations on wellness programs in April 2015. With minor changes, the EEOC then issued its final regulations in May 2016. Contemporaneous with the issuance of its final regulations under the ADA, the EEOC also issued final regulations under the Genetic Information Nondiscrimination Act of 2008 (GINA).
The Americans with Disabilities Act (ADA) was enacted in 1990 to prohibit employers from discriminating against individuals with disabilities. The ADA can affect wellness programs in two ways. First, employers are permitted to collect medical information through health assessments and biometric screenings only if certain conditions are satisfied. Second, employers are prohibited from using such information to discriminate based on a disability.
One key point of the EEOC regulations is that an employer is permitted to conduct medical examinations and solicit medical histories as part of a wellness program available to employees, but only if participation is voluntary. In order to meet the voluntary standard, the program must meet all of the following requirements:
- There can be no requirement that employees participate.
- There can be no denial of coverage or coverage limitations under any employer-sponsored group health plan due to non-participation in the program.
- There can be no adverse employment action (such as retaliation, coercion, threats) against an employee in any way related to participation in the program or any outcome of participation in the program.
- The program must comply with specific incentive limitations. The general rule is that a reward under both participatory and health-contingent programs cannot exceed 30% of the cost of coverage (including employer and employee contributions). For a wellness program limited to employees who are enrolled in the employer’s group health plan, the 30% limit applies to the total cost of employee-only coverage (under the lowest-cost plan option, in the case of an employer that offers more than one option). Also, there is no exception to the 30% limit based on use of tobacco.
- A notice must be provided to employees. A model notice meeting the requirements is available from the EEOC at https://www.eeoc.gov/laws/regulations/ada-wellness-notice.cfm.
The EEOC regulations also require that a wellness program be “reasonably designed to promote health or prevent disease.” The requirements to satisfy this standard are as follows:
- The program must have a reasonable chance of improving the health of, or preventing disease in, employees who participate.
- The program cannot be “overly burdensome.”
- The program cannot be a subterfuge for violating the ADA or other laws prohibiting discrimination in employment.
- The method chosen to promote health or prevent disease cannot be “highly suspect.”
As an example, a program that asks employees to participate in a biometric screening so they can be made aware of health risks exposed by the screening is “reasonably designed,” while a program that collects information without providing the results to the participants or related advice on how to improve their health would not satisfy the standard.
Under the EEOC regulations, an employer must also offer a “reasonable accommodation” in the context of a participatory program. For example, if a program provides a financial incentive to any employee who completes a biometric screening that includes giving a blood sample, the employer must provide an alternative test (or certification requirement) to an employee with a condition that makes drawing blood dangerous, so that the employee can safely earn the incentive.
Generally, GINA prohibits a group health plan from requesting or requiring genetic testing or using genetic information to determine premiums or for underwriting purposes, and prohibits employers from discriminating against employees on the basis of genetic information or purchasing genetic information with respect to employees and family members.
In the context of wellness programs, GINA generally prohibits the offering of financial incentives for an employee to provide information on the employee’s medical history, and that of the employee’s family members (defined to include the employee’s spouse). However, the EEOC’s final regulations provide that GINA does not prohibit an employer from offering an incentive to complete an HRA including the employee’s spouse, provided that:
- The HRA only requests information about the spouse’s manifestation of disease or disorder,
- The HRA is reasonably designed to promote health or prevent disease (similar to the ADA requirement),
- The spouse provides prior, knowing, and voluntary authorization in writing (and the authorization form adequately describes the confidentiality protections and restrictions on the use of genetic information),
- The HRA is administered in connection with the spouse’s receipt of health or genetic services offered by the employer (e.g., via the wellness program), and
- The HRA incentive is limited to the same 30% limit applicable under the ADA.
As referenced earlier, the final EEOC regulations (under both the ADA and GINA) are scheduled to become effective as of the first day of the first plan year that begins on or after January 1, 2017.
Inconsistencies in the Regulations
While many employers and practitioners in the benefits community were hoping that the EEOC regulations would be fully-aligned with the regulations issued by the Tri-Agencies under HIPAA/ACA, the EEOC regulations reflect significant differences.
- While the HIPAA/ACA regulations impose “reasonable design” criteria only on health-contingent wellness programs, the ADA/GINA regulations also apply such criteria to any participatory programs that include HRAs and/or biometric screenings.
- While incentive limits under HIPAA/ACA apply only to health-contingent wellness programs (and not to participatory programs), incentive limits under the ADA/GINA rules apply to both types of programs.
- The ADA/GINA regulations apply to stand-alone wellness programs as well as those tied to group health plans.
- Notices that satisfy HIPAA/ACA requirements do not necessarily satisfy notice requirements under the ADA/GINA.
- Under GINA, incentives are not permitted to be provided in exchange for current or past health status information regarding children.
Legal Challenges By and Against the EEOC
The ADA provides for an “insurance safe harbor” which permits the gathering of health data from employees as long as the data is used for underwriting or risk classification purposes, such as to determine insurability or establish premium rates. In recent years, some employers have successfully used the safe harbor as a defense to EEOC actions claiming that their wellness programs violated the ADA by tying financial incentives to HRAs or biometric screening. See, for example, EEOC v. Flambeau, Inc., 131 F. Supp. 3d 849 (W.D. Wis. 2015). The EEOC responded by writing its final regulations to specifically make the safe harbor unavailable to employers sponsoring wellness programs. Employers argue that (a) the EEOC’s position is not consistent with the language of the ADA or its purpose, and (b) the EEOC’s regulations exceed its regulatory authority. The Flambeau case is currently on appeal to the U.S. Court of Appeals for the Seventh Circuit. Success by the EEOC in this case, or others, would solidify its position and the validity of its regulations. Success by the employers in these cases could invalidate the EEOC regulations before they become effective, requiring employers to revisit any compliance efforts taken in anticipation of the effective date.
The IRS Gets its Cut of Wellness Programs: Taxation
On top of the variety of issues related to the design and legality of wellness programs, the IRS has also recently weighed in on the taxation of incentives provided in connection with such programs. Generally, cash or any other item of value provided by an employer to an employee is taxable to the employee under the Internal Revenue Code. (Small items, such as tee-shirts and water bottles, can be excluded as “de minimis” fringe benefits under Section 132 of the Code.) However, under Sections 105 and 106 of the Code, employer-provided coverage under a plan providing accident or health benefits, and amounts paid to reimburse the employee, employee’s spouse or dependents for expenses incurred by the employee for medical care, are not included in the employee’s taxable income.
In the context of a wellness program, health screenings and other forms of medical care are not taxable to the employee under these rules. However, in Chief Counsel Memorandum 201622031 (issued in April 2016), the IRS has indicated that a cash reward paid to an employee for participation in a wellness program may not be excluded from the employee’s taxable income. This includes payments to a third-party on behalf of an employee that technically do not constitute medical care (e.g., gym membership fees). Reimbursements of premiums for participation in a wellness program are also taxable to the employee, even if the premiums were originally paid via a salary reduction agreement the employee had in effect under a Section 125 cafeteria plan maintained by the employer.
In light of these rules, employers need to be mindful that taxable rewards are subject to wage withholding and employment taxes, and must be included on the Form W-2 issued to the employee, even if paid by a third-party vendor of the wellness program.
Reducing healthcare costs by promoting health and preventing disease seems a simple concept, yet the considerations in the design and implementation of programs that are fair to all participants have made wellness programs very complex. Employers should consult with qualified legal counsel when instituting a new wellness program, or to review their existing programs, as this area of the law continues to evolve.