Can you add a tobacco surcharge to healthcare premiums? The answer is yes.  However, since tobacco surcharges were instituted by various employers, they have been under attack by employees, particularly through class action lawsuits.  There have been more than 30 putative class actions against employers challenging tobacco premium surcharges in recent years.  There have been four settlements during this time, with the settlements ranging from 35-62% of the value of the tobacco premium surcharges collected by the employers.  Let’s take a look at when are they legal and when they are not.

If it is part of a wellness plan and the program meets the following five criteria, the surcharge should be legal.  The five criteria are:

1. Plan participants must have an opportunity to qualify for the incentive (i.e., avoid the tobacco surcharge) at least once per year.
2. Incentives tied to tobacco use can’t exceed 50% of the total cost of coverage; other health-contingent incentives can’t exceed 30% of the total cost of coverage. For this purpose, the total cost of coverage includes both employer and employee contributions.
3. The wellness program must be reasonably designed to promote health or prevent disease and can’t be overly burdensome (i.e., it can’t be a cover for discriminating based on a health factor).
4. A reasonable alternative standard for obtaining the full reward must be available to participants who don’t meet the initial health standard (or a waiver of the initial standard must be available). For example, if the health standard is being a nonsmoker, then a RAS (e.g., completion of a smoking cessation program) must be available for smokers.
5. The RAS must be disclosed in all plan materials describing the wellness program, along with contact information for more information about the RAS.

Common pitfalls include compliance with the fine print in the rule around incentives and the RAS requirement.  For example, if done correctly, employees who complete an RAS should not pay more than a nonsmoking employee. The employee does not actually have to become a nonsmoker.

In a recent case that survived a motion to dismiss, Mehlberg v. Compass Group, USA, Inc., No. 24-cv-04179-SRB (United States District Court for the Western District of Missouri, 4/15/25), the court ruled that the filing plausibly alleged that the tobacco premium surcharges violated the HIPAA non-discrimination rules because the plan did not offer a retroactive reimbursement of the annual surcharge amount upon completion of the tobacco cessation course.  It then stated that the statutory and regulatory requirement that a participant must be eligible for the wellness program’s “full reward” means that the reward must apply retroactively.

Further, the court ruled that Mehlberg sufficiently alleged that the plan’s notice materials describing the tobacco cessation program were deficient because they did not contain disclosures regarding accommodations for a physician’s recommendations.  The court specifically described that, at the motion to dismiss stage, these allegations regarding the undisclosed accommodation were sufficient to state a claim for relief.

In another case, Chirinian v. Travelers Cos., Inc.,  No: WL 2147271  (D. Minn. 2025), Chirinian alleged the employer’s wellness program violated ERISA by setting a deadline for enrolling in a tobacco cessation program, failing to disclose a reasonable alternative standard, and failing to inform plan participants that they could consult with their physicians when determining a reasonable alternative standard. Although the court ruled that the employer’s plan structure met ERISA requirements because it provided plan participants with the opportunity to avoid the surcharge each year by completing a tobacco cessation program and retroactively refunding the surcharges to those who completed the program by a certain deadline, it allowed the case to continue because the notice was deficient.  It did not inform plan participants about their right to involve their physicians.

If you implement a tobacco surcharge, ensure that the wellness program allows for reimbursement of the surcharge and notice is fully vetted by legal counsel so not to be in violation of the law.

Source: Hall Benefits 10/7/25, Groom Law Group 4/23/25, Mercer 10/23/24