Legal Issues to Consider with Wellness Programs
Unfortunately an employer considering a wellness program needs to ensure the arrangement is compliant with the many relevant federal and state laws. This is particularly true as employers look for creative ways to incent employees to voluntarily participate in wellness programs or, as is the growing trend, seek ways to compel mandatory participation. The good news is that Health Care Reform includes a helpful change that gives employers more flexibility to offer meaningful incentives to participate in wellness programs.
American Fidelity does not provide tax or legal advice. We hope the following will be a helpful introduction to some of the rules governing wellness programs and recommend you consult with your tax and legal counsel to learn more, particularly given the complexity of these issues.
Laws Governing Wellness Programs
The following laws govern the design of wellness programs. Click on each for an introduction to the rules.
- The Health Insurance Portability and Accountability Act of 1996 (HIPAA) nondiscrimination rules
Generally, the nondiscrimination rules under HIPAA prohibit a group health plan from discriminating on the basis of an individual’s health factor (such as health status, medical condition, medical history, and claims experience.) HIPAA wellness regulations govern programs that provide incentives based on the absence or existence of a health factor. There are different rules for programs that provide incentives based on mere participation in a wellness program and those that provide incentives based on the achievement of a health factor.
Participatory Programs - A wellness program that provides an incentive based on participation in a health program, rather than achievement of a particular health target or standard, is generally considered nondiscriminatory under HIPAA. Examples of incentives that are conditioned on participation rather than results include the following:
- A program that reimburses the cost of a gym membership;
- A program that provides a reward for attending a monthly health education seminar;
- A program that provides an incentive to participate in a cholesterol or blood screening that is paid regardless of the outcome; and
- A program that provides for reimbursement for participation in a weight loss or smoking cessation program regardless of the outcome.
Wellness Programs That Provide a Reward Based on Achievement of a Health Factor - The following are examples of wellness programs designed to provide an incentive based on achievement of a health factor:
- A program that reimburses the cost of a gym membership if a stated weight loss goal (e.g., body mass index) is achieved;
- A program that provides an incentive to individuals who participate in a cholesterol or blood screening and whose cholesterol is reduced below a stated level; and
- A program that provides for reimbursement for participation in a weight loss or smoking cessation program if a weight loss goal is achieved or the individual quits smoking.
These types of wellness programs must meet the following five requirements in order to be nondiscriminatory for purposes of HIPAA:
- The total reward that may be provided to an individual cannot exceed 20% of the total cost of employee-only coverage (note that this is the limit that will be increased under the Health Care Reform wellness incentive provision)
- The program must be reasonably designed to promote health or prevent disease;
- The program must allow eligible individuals an opportunity to qualify for the award at least annually;
- The program must be available to all similarly-situated individuals; if it would be unreasonably difficult or medically inadvisable for an individual to attempt to satisfy the standard, the program must provide a reasonable alternative; and
- All materials describing the material terms of the program must disclose the availability of a reasonable alternative standard
- The Internal Revenue Code (the Code)
As a general rule, the value of an incentive provided under a wellness program is includible in the recipient’s gross income for federal income tax purposes unless it is specifically allowed by the Internal Revenue Code to be provided on a tax-free basis. The following are examples of types of benefits that may be provided on a tax-free basis to employees:
- Contributions to an employee’s Health Flexible Spending Arrangement (FSA), Health Reimbursement Arrangement (HRA), or Health Savings Account (HSA);
- A discount on the employee contribution required to participate in employer-sponsored health coverage;
- A reduction in the amount of the deductible under employer-sponsored health coverage; and
- Free or subsidized access to an athletic or gym facility that is operated by the employer and located on the employer’s worksite.
By contrast, the following are examples of common benefits that would result in taxable income to the employee:
- Cash or a cash equivalent (e.g., gift card), regardless of the amount;
- Movie or other entertainment tickets; and
- All expense paid trip to a resort (without any business purpose).
An employer may want to review wellness program incentives not only to ensure Internal Revenue Code compliance but also, from an employee relations standpoint, in order to design the wellness program incentives in a tax-favored manner. Finally, depending on who actually receives the subsidies, there may be additional tax issues (such as nondiscrimination requirements) that need to be considered.
- Americans with Disabilities Act (ADA)
The ADA generally prohibits an employer from discriminating against an individual with a disability with regard to employment and benefits. The ADA specifically exempts health programs from its requirements if participation in the program is voluntary, the health information that is obtained remains confidential and separate from other employment records, and the information obtained is not used to limit health insurance coverage eligibility or to take adverse employment action or deny promotional opportunities.
According to informal guidance provided by the EEOC, a wellness program is voluntary (and therefore disability-related questions would be permissible) if the employer neither requires participation nor penalizes employees for non-participation in the program. The EEOC has stated that any penalty, regardless of the amount, makes the program mandatory and therefore would violate the ADA.
- Genetic Information Nondiscrimination Act of 2008 (GINA)
GINA prohibits discrimination in health coverage based on genetic information. Specifically, group health plans and insurers may not adjust premium or contribution rates based on genetic information; request or require an individual or family member to undergo a genetic test; or request, require or purchase genetic information prior to or in connection with enrollment, or at any time for underwriting purposes. Wellness programs or health risk assessments that request genetic information, including family medical history, violate GINA if participants receive any type of reward for completion, including a discount or rebate in premiums or copayments.
- Other laws – federal and state rules that apply to various programs
Some of the other laws that may impact wellness programs are the Age Discrimination in Employment Act (ADEA), Title VII of the Civil Rights Act, state privacy laws, and state laws that restrict an employer’s ability to regulate employees’ behavior during non-work hours.
American Fidelity Assurance Company does not provide tax or legal advice.