Company Ordered to Pay Restitution after DOL Investigates Tobacco Surcharge Failures

January 8, 2019

On Nov. 30, 2018, the DOL announced that it has entered into a settlement to resolve its lawsuit against Dorel Juvenile Group, Inc., a Massachusetts based juvenile products company with thirty-four locations worldwide. The DOL challenged Dorel’s wellness program under ERISA by alleging that the employer breached their fiduciary responsibilities and discriminated against employees from 2013 to 2017 by requiring them to pay health premium surcharges through the imposition of an impermissible wellness program.

Specifically, the DOL filed its lawsuit in U.S. District Court for the Southern District of Indiana and contended that Dorel instituted a wellness program that unlawfully required employees to pay a tobacco use surcharge without the availability of the required reasonable alternative standard or waiver.

As background, if a wellness program provides a reward (premium reduction) for individuals satisfying a standard related to a health factor (in this case, the health factor being nicotine-free), then this is called an outcomes-based health contingent wellness program and the program must meet five requirements in order to comply with the HIPAA nondiscrimination rules.

First, the premium differential may not exceed 30 percent. If the program is designed to eliminate or reduce tobacco usage, the reward may be up to 50 percent of the premium cost. This means that the amount of the reward (or premium reduction) given for being nicotine free cannot be more than 50 percent of the total premium cost. The cost is based on the employer and employee contributions for self-only coverage. If the spouse and dependents are also included in the wellness program, then the reward may be based on the cost of the applicable premium.

Second, the program should be designed to "promote health and prevent disease." The employer should have written documents explaining the program and its purpose.

Third, participants must be offered an opportunity at least once annually to meet the standard and thus qualify for the reward.

Fourth, the employer must offer a reasonable alternative standard for obtaining the reward. In other words, the employer must provide an alternative way for an employee (spouse or child) to receive the reward other than being tobacco free. A reasonable alternative must be provided to all individuals who do not meet the requirement of being tobacco free. For example, many employers choose to require a smoking cessation program as the reasonable alternative standard.

So, the employer can require the employees to meet this standard each plan year. However, the employer has to give the employee the entire plan year to complete the reasonable alternative standard. Additionally, the employer would have to make the reward retroactive to the beginning of the plan year.

Fifth and finally, all program materials must include information on the availability of a reasonable alternative standard.

As part of the settlement Dorel must revise the tobacco surcharge contained in its wellness program to comply with HIPAA, which prohibits group health plans from discriminating against individuals in eligibility and continued eligibility for benefits and in individual premium or contribution rates on the basis of any health status-related factor. Dorel must also ensure that participants who utilize a reasonable alternative standard earn the same reward as non-tobacco users and cannot require plan participants to submit a tobacco use certification more than once per year.

Additionally, under the settlement Dorel agreed to pay restitution of $145,635 to 596 employees of their California, Indiana, and Massachusetts facilities who paid a tobacco use surcharge as part of their medical insurance premium during the period 2013 to 2017.

Finally, Dorel was also assessed a civil penalty under ERISA for breach of fiduciary duty totaling $29,127, which is twenty percent of the applicable recovery amount. The DOL agreed to compromise and reduce the amount of the penalty to $14,563.50, which is a fifty percent reduction, if Dorel waived certain notice rights regarding the penalty and its right to seek any further reduction of the penalty under ERISA.

Employers sponsoring a wellness program should consider the consequences of failing to do so in a HIPAA-compliant manner. Contact your advisor for more detailed information on the HIPAA wellness requirements.

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