• Trio of Agencies Issue Final Regulations on Wellness Programs
  • June 14, 2013 | Authors: Adam M. Meehan; Evelyn Small Traub
  • Law Firms: Troutman Sanders LLP - Atlanta Office ; Troutman Sanders LLP - Richmond Office
  • This is the twenty-fourth in a series of advisories on Health Care Reform and other recent developments in health care.

    “The Intention of the Departments in these final regulations is that, regardless of the type of wellness program, every individual participating in the program should be able to receive the full amount of any reward or incentive, regardless of any health factor.”


    The Departments of Treasury, Labor, and Health and Human Services recently issued final regulations on employment-based wellness programs that are subject to the nondiscrimination provisions of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The final regulations apply to group health plans and group health insurance issuers (for purposes of this article, the use of “plan” or “plans” encompass both group health plans and group health insurance issuers). Troutman Sanders has previously summarized the proposed regulations issued on November 20, 2012.

    Although the final regulations retain general principles from the 2006 HIPAA regulations on wellness programs and largely track the proposed regulations issued last year, this alert will summarize some of the noteworthy takeaways from the guidance.

    Background - Participatory and Health-Contingent Wellness Programs

    The final regulations impose limits on employer sponsored wellness programs, of which there are two varieties - participatory wellness programs and health-contingent wellness programs.

    Participatory wellness programs are designed to make participation available to all similarly situated employees. Examples of participatory programs include discounted or reimbursed costs of a fitness center membership and providing no-cost health education seminars. The rewards for participatory wellness programs are not limited or aggregated with the limits applicable to health-contingent wellness programs. Participatory wellness programs need not be tested for discrimination, provided that they are available to all similarly situated employees, without regard to health status.

    By contrast, health-contingent wellness programs generally provide rewards to participants who satisfy a standard related to a certain health factor. Examples of health-contingent wellness programs include smoking cessation, attainment of certain results on biometric screenings, or meeting targets for exercise. There are generally five requirements (described below) of health-contingent wellness programs.

    Takeaways of the Final Regulations

    The following are key takeaways from the agencies’ recently-issued guidance on wellness programs:

    • Five Basic Requirements. The final regulations retain, and clarify, the five requirements for health-contingent wellness programs:

      • The program must give eligible individuals an opportunity to qualify for the reward at least once per year;

      • The reward for all of the health-contingent wellness programs in the aggregate must not exceed thirty percent (30%) of the total cost of employee-only coverage under the plan (as opposed to twenty percent (20%) under previous guidance), or fifty percent (50%) to the extent the program is designed to prevent or reduce tobacco use.[1] If the program is available to other members of the employee’s family, the reward cannot exceed the applicable percentage of the total cost of the health coverage in which the employee and dependents are enrolled;

      • The reward must be available to all similar situated individuals or a reasonable alternative standard must be available to any individual with a medical condition, in which the medical condition makes the otherwise applicable standard unreasonably difficult to satisfy;

      • The program must be reasonably designed to promote health or prevent disease - For this purpose, the program must have a reasonable chance of improving the health of participating individuals and not be (i) overly burdensome, (ii) a subterfuge for discriminating based on a health factor, or (iii) highly suspect in the method chosen to promote health or prevent disease; and

      • The plan must disclose in all of the materials describing the terms of the program, the availability of other means of qualifying for the reward or the possibility of waiver of the otherwise applicable standard.

    • Reward. The final regulations confirm that the term “reward” includes both positive incentives and penalties. Accordingly, wellness program rewards can be either (i) discounts or rebates of a premium or contribution, waivers of a copayment or other cost-sharing mechanism or any financial, or other incentive or (ii) the avoidance of a penalty, such as a premium surcharge or other disincentive. A wellness reward related to tobacco use is treated as earned for purposes of determining whether the employee’s required contribution toward group health coverage meets the affordability test applicable in determining whether the employer is liable for penalties under IRC Section 4980H (see Health Care Reform - Practical Administration Update). A wellness reward that does not relate to tobacco use is not treated as earned for affordability purposes.

    • Reasonable Alternative Standard. Although the agencies are continuing to allow flexibility in designing reasonable alternative standards, the final regulations provide clarification on what constitutes “reasonable” in this context. All of the facts and circumstances are taken into account in determining whether an alternative standard is reasonable. The final regulations provide some examples of “reasonable” standards:

      • If the reasonable alternative standard is completion of an education program, the plan must either provide the program or assist the employee in finding such a program and may not require that the individual pay for the program.

      • The time commitment must reasonable.

      • For a diet program, the plan does not have to pay for the costs of the food but must pay any membership or participation fee.

      • If an individual’s physician says that the plan standard is not medically appropriate, the plan must provide a reasonable alternative standard that accommodates the recommendations of the physician.

    • The final regulations divide health-contingent programs into two groups in order “to make it clearer to whom a plan or issuer is required to provide a reasonable alternative standard.”

    • Activity-only programs do not require an individual to attain a specific outcome, such as programs that solely involve walking, diet or exercise. For these programs, a reasonable alternative standard for obtaining the reward must be provided for any individual for whom, due to a medical condition, it is unreasonably difficult to meet the otherwise applicable standard. For example, if the program is a running program and an individual is incapable of running due to a medical condition, a reasonable alternative may be a walking program. Here, in contrast with the outcome-based programs described below, the final regulations clarify that it is permissible for a plan to seek verification (e.g., a doctor’s note) of the medical condition.

    • Outcome-based programs require an individual to attain a specific outcome, such as particular body mass index (BMI), non-smoker status, or specific cholesterol levels. These programs are allowed to conduct measurement techniques in order to target the programs effectively. For example, targeting individuals with high cholesterol for cholesterol reduction programs or tobacco users for tobacco cessation programs, instead of targeting the whole work force. However, for these programs, a reasonable alternative standard must be provided to all individuals who do not meet the initial standard, regardless of any medical condition or other health status. Therefore, the reward must be based on the targeted health outcomes OR participation in the reasonable alternatives. Here, the final regulations clarify that it is impermissible for plans to require verification (e.g., a doctor’s note) of a medical condition or health status as a condition to providing the reasonable alternative. The regulations explain that this broader application to all individuals, which is divergent from the previous guidance, is to ensure that the program is reasonably designed to improve health and is not a subterfuge for underwriting or reducing benefits.

      The final regulations recognize that a reasonable alternative standard could be an activity-only program or an outcome-based wellness program, in itself, which will be required to follow all the same rules of the programs. For example, if the initial reasonable alternative is an activity-only program, the plan must provide further reasonable alternatives to any individual who has a medical condition that precludes them from participating, and if the initial alternative is an outcome-based program, the plan must provide a reasonable alternative to every individual without regard to health status. The final regulations do recognize that this could lead to a never-ending cycle of reasonable alternatives and special rules are provided to prevent such occurrence.

      Finally, in lieu of providing a reasonable alternative standard, a plan can simply waive the otherwise applicable standard and just provide the reward.

    • Standard of Review. In some situations, an adverse benefit determination as to whether a participant is entitled to an alternative standard involves a medical judgment that may be subject to the Federal external review procedures established by Health Care Reform (see Health Care Reform - Guidance Published for Federal External Review Procedures and Model Notices for Internal Claims and Appeals and External Reviews).

    • Personal Physician Deference. The proposed regulations required that an alternative that accommodates a personal physician’s recommendations must be provided if the personal physician opines that the plan’s alternative standard is medically inappropriate for the individual (only if the physician joins in the request). The final regulations provide for greater deference to personal physicians by requiring the plan to permit the individual to comply with the personal physician’s recommendations as a second reasonable alternative standard (beyond the initial alternative), regardless of whether the personal physician agrees or disagrees about the medical appropriateness of the initial alternative for the individual.

    • Timing of the Reward. The final regulations provide that a reward for a reasonable alternative standard must be the “same, full reward” as available to individual who satisfy the otherwise initial standard. When an individual takes some time to request, establish and satisfy a reasonable alternative, the plans must make sure that they receive the same award as the other participants who have satisfied the initial standards, even if the latter satisfied the standard at an earlier time. The final regulations emphasize flexibility in this regard so long as the individual receives the full amount of the award, and the guidance provides examples that include retroactive payments for the time before the alternative was satisfied or pro rata strategies through the remainder of the year.

    • Notice. The final regulations require plans to disclose the availability of a reasonable alternative standard in all plan materials that describe the terms of a health-contingent wellness program (does not include a disclosure in which the plan materials merely mention the availability of the program), as well as any disclosure that informs an individual of a failure to satisfy an initial outcome-based standard. The notice must also include the contact information for an individual to obtain the alternative and a statement that advises that an individual’s personal physician will be accommodated. The final regulations include sample language to satisfy this notice requirement.

    • Penalty. The failure of a wellness program to meet the applicable requirements under the final regulations will subject the plan to excise taxes that generally amount to $100 for each day the plan is not compliant with respect to each individual to whom the failure relates. Further, although compliance with the final regulations offers an affirmative defense to employers against a claim of impermissible discrimination in violation of HIPAA, employers must still be cautious as the final regulations instruct that this compliance is not determinative of compliance with any other applicable federal or state laws - most notably, the Americans with Disability Act of 1990.

    In summary...

    The final regulations will apply to all plans that offer wellness programs, including both grandfathered and non-grandfathered plans, effective for plan years beginning on or after January 1, 2014. The guidance also notes that the departments anticipate issuing further subregulatory guidance to provide additional clarity and potentially proposing modifications to the final rule, as necessary.

    [1] Notably, the Affordable Care Act authorized an increase of the maximum award to fifty percent (50%) if authorized by regulations.