On June 3, 2013, the Internal Revenue Service, Employee Benefits Security Administration, and Health and Human Services Department issued final regulations under the Patient Protection and Affordable Care Act applicable to employer wellness programs. The primary changes under the regulations are increases to maximum permissible rewards in specific situations, clarifications to the categories of wellness programs, and the reasonable alternatives that must be provided in order to avoid discrimination. Employers should evaluate their wellness programs to in light of the new regulations, which will be effective for all plans beginning on or after January 1st, 2014.
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) included provisions on nondiscrimination and wellness programs. Under these rules, group health plans and group health insurance issuers are generally prohibited from discriminating against individual participants and beneficiaries in eligibility, benefits, or premiums based on a health factor. One exception to this rule is that plans may award premium discounts, rebates, or modifications to otherwise applicable cost sharing (including copayments, deductibles, or coinsurance) if participants adhere to certain programs related to health promotion and disease prevention.
The Departments of Labor, Health and Human Services (HHS), and the Internal Revenue Service (collectively, the “Departments”) published joint final regulations implementing HIPAA nondiscrimination and wellness provisions on December 13, 2006 (the “2006 Regulations”). The 2006 Regulations divided wellness programs into two categories: participatory and health-contingent programs.
Section 1201 of the Patient Protection and Affordable Care Act (ACA) amended and codified the HIPAA nondiscrimination and wellness provisions, extending the HIPAA nondiscrimination protections to the individual market. In November 2012, the Departments published proposed regulations implementing the provisions as amended, and the final regulations were released on June 3, 2013.
These final regulations are applicable to group health plans and health insurance issuers in the group and individual markets for plan years (in the individual market, policy years) beginning on or after January 1, 2014. Under these final regulations, the same wellness program standards apply to grandfathered health plans and non-grandfathered plans.
Revised Categories of Wellness Programs
Participatory wellness programs are defined under the final regulations as programs that either do not provide a reward or do not include any conditions for obtaining a reward that are based on an individual satisfying a standard that is related to a health factor. These programs are considered to comply with HIPAA nondiscrimination requirements as long as they are made available to all similarly situated individuals, regardless of health status. This means that distinctions can be made based on bona fide employment-related classifications consistent with usual business practice, such as distinguishing between beneficiaries based on relationship to the plan participant (i.e. spouse or dependent child).
If a non-health factor prevents someone from taking advantage of a program (i.e., a weekly class that conflicts with an individual’s schedule), the program is still permissible under HIPAA nondiscrimination rules.
Examples of participatory wellness programs include: (1) a program that reimburses employees for all or part of the cost of membership in a fitness center; (2) a diagnostic testing program that provides a reward for participation and does not base any part of the reward on outcomes; and (3) a program that provides a reward to employees for attending a monthly, no-cost health education seminar.
Health-contingent wellness programs, on the other hand, require an individual to satisfy a standard related to a health factor to obtain a reward (or require an individual to undertake more actions than a similarly situated individual based on a health factor in order to obtain the same reward). Under the new regulations, these programs have been subdivided into two categories: activity-only and outcome-based health-contingent wellness programs. The biggest difference in regulation between the two categories is how broadly they must provide a reasonable alternative (described in detail below).
- Activity-only wellness programs require an individual to perform or complete an activity related to a health factor in order to obtain a reward, but not to achieve a specific health outcome. Examples include walking, diet, or exercise programs.
- Outcome-based wellness programs require an individual to attain or maintain a specific health outcome in order to obtain a reward. Generally, these involve (1) a measurement, test, or screening to establish an initial standard, and (2) a program that targets individuals who do not meet the initial standard with wellness activities. For example, a program might test individuals for specific medical conditions (abnormal bod mass index (BMI), high cholesterol) and then reward employees considered to be within a healthy range, while requiring employees outside of this range to take steps (like taking a fitness class, or meeting with a nutritionist) in order to obtain the same reward.
Requirements for All Health-Contingent Wellness Programs
The final regulations re-organize and clarify the five overarching requirements that all health-contingent wellness programs (but not participatory wellness programs) must fulfill:
- Frequency of Opportunity to Qualify: All health-contingent wellness programs must provide individuals eligible for the program the opportunity to qualify for the reward at least once a year.
- Size of Reward: The total amount of the reward for health-contingent wellness programs is limited with respect to the plan. The standard maximum permissible reward increased from 20% to 30% of the cost of coverage, and for programs designed to prevent or reduce tobacco use, the reward is capped at 50% of the cost of coverage.
- Reasonable Design: A wellness program is reasonably designed if it has a reasonable chance of improving the health of, or preventing disease in, participating individuals, and is not overly burdensome, is not a subterfuge for discrimination based on a health factor, and is not highly suspect in the method chosen to promote health or prevent disease.
- Uniform Availability and Reasonable Alternative Standards: Like a participatory wellness program, the full reward under any health-contingent wellness program must be available to all similarly situated individuals. Plan issuers must provide reasonable alternative standards for attaining a reward if certain individuals request one. Which groups of individuals are entitled to a reasonable alternative standard under a plan depends on whether the initial program is activity-only and outcome-based health-contingent wellness programs (covered below). Additionally, the full reward must be given to anyone who satisfies the standard at any time of year, even if it takes several months to request, establish, and satisfy a reasonable alternative standard. Employers can decide whether to pay the retroactive reward as a lump sum, or over the rest of the year.
- Notice of Availability of Reasonable Alternative Standard: The final regulations require plans and issuers to disclose the availability of a reasonable alternative standard to qualify for the reward. A disclosure of the availability of a reasonable alternative standard includes contact information for obtaining the alternative and a statement that recommendations of an individual’s personal physician will be accommodated. For outcome based-wellness programs, this notice must also be included in any disclosure that an individual did not satisfy an initial outcome-based standard. Note that a program can also simply waive the otherwise applicable standard in the cases where a reasonable alternative standard would be necessary and still fulfill the HIPAA nondiscrimination provisions.
Reasonable Alternative Standard
All health-contingent wellness programs must provide a reasonable alternative standard (or waive the condition for obtaining the reward) to certain individuals, but which groups of individuals are entitled to make that request depends on the type of program:
- Activity-only programs require that a reasonable alternative method only be offered to those for whom it is medically unadvisable to attempt to satisfy the program standard or unreasonable difficult due to a medical condition. The plan may seek verification and require a doctor’s note.
- Outcome-based programs must offer alternatives to a much broader group: any individual who does not meet the initial standard must be provided with an alternative method of obtaining the reward.
All facts and circumstances are taken into account when evaluating whether an alternative standard is reasonable.
To the extent that a reasonable alternative standard is in itself an activity-only or outcome-based program, it must generally comply with the requirements for such a wellness program as if it were an initial standard. However, a reasonable alternative standard that is an outcome-based program is subject to two additional rules:
- The reasonable alternative standard cannot be a requirement to meet a different level of the same standard without additional time to comply (i.e. if the initial standard is to achieve a BMI under 30, the reasonable alternative cannot simply be to achieve a BMI under 31; but a reasonable alternative standard could be to reduce an individual’s BMI by a small amount or percentage over a realistic period of time).
- An individual must be given the opportunity to comply with the recommendations of the individual’s personal physician as a second reasonable alternative standard as long as the physician joins in the request. Such a request can be made at any time, and the physician may adjust the recommendations at any time.
Fraser Stryker is a leader in tax and employee benefits law. Attorneys in the Firm’s Taxation and Employee Benefits Practice Groups advise individuals, business entities, governments, and nonprofit/tax-exempt organizations on a wide variety of tax and employee benefits matters and transactions. Fraser Stryker works with employers to implement and maintain employee benefit plans that help attract and retain top talent. For more information on designing wellness programs or amending current wellness programs to comply with the new regulations, please contact Emily Wischnowski, Kevin Tracy or Nicole R. Konen.
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