Designing an ERISA Wellness Program That Reduces Tobacco Use
A recent court decision in Williams v. Bally’s Management Group, LLC upheld the use of a tobacco cessation program in an employer’s wellness program despite arguments form an employee that the program unfairly penalized individuals who could not meet the tobacco cessation requirement.
This is an important case that analyzes three issues:
How ERISA’s nondiscrimination rules apply to employer wellness programs.
What a “reasonable accommodation” means in this space, including how ADA accommodations, ERISA, HIPAA and the ACA “reasonable alternative standards” fit together.
How these interact with tobacco cessation programs upheld in the court’s decision in Williams v. Bally’s Management Group, LLC ("Bally's").
Why ERISA matters for wellness programs
If an employer offers health benefits to employees, there is a good chance those benefits are part of an “employee welfare benefit plan” covered by a federal law called ERISA. ERISA sets baseline rules for employer-sponsored benefit plans. It does not force employers to offer any particular benefits, but when they do, ERISA governs how the plan is administered, requires clear plan documents, imposes fiduciary duties on plan decision-makers, and provides certain participant protections.
Wellness programs often live inside or alongside the group health plan that ERISA covers. That means the program’s design (i.e. whether it can offer a premium discount for hitting a step goal or impose a surcharge on tobacco users) has to line up with ERISA’s nondiscrimination rules and related health-plan rules under HIPAA and the Affordable Care Act (ACA). These rules aim to prevent charging people more just because of their health status, while still allowing employers to offer wellness incentives if they follow specific guardrails.
ERISA Nondiscrimination Rules
At a high level, employer health plans cannot charge you more just because you have a particular health status. That’s the nondiscrimination rule. But there is an important exception for wellness programs. Plans can offer incentives (or impose surcharges) connected to wellness activities if they follow specified conditions designed to keep things fair. Think of it as a controlled exception: the program can nudge healthy behavior, but it must give people a fair path to earn the incentive or avoid extra costs even if they have health issues that make the initial requirement hard to meet.
These rules apply to two different types of wellness programs:
1. Participatory Programs
A participatory program rewards you simply for taking part in an activity, not for meeting a health standard. Examples include reimbursing the cost of a gym membership, giving a gift card for completing a health risk assessment (without requiring any results), or paying for a nutrition class. These programs don’t hinge on your health status, so they generally do not have to meet the health-contingent rules for wellness programs.
2. Health-contingent Programs
A health-contingent program requires you to meet a health-related standard to earn a reward or avoid a surcharge. These programs must satisfy several guardrails to be compliant. There are two subtypes:
Activity-only programs. You must complete an activity related to health (for example, walking 10,000 steps a day) but you are not required to achieve a specific health outcome like a certain BMI or blood pressure.
Outcome-based programs. You must achieve a specific health outcome (for example, being tobacco-free or keeping A1C below a certain level) to get the reward or avoid the surcharge.
These programs must offer a reasonable alternative standard if it’s medically inadvisable or unreasonably difficult for you to do the activity or achieve the outcome because of a medical condition.
Reasonable Alternative Standards (“RAS”)
A RAS is the safety valve that keeps wellness incentives from becoming unfair penalties. In practice, it means the plan must offer a different goal or method that a participant can satisfy if they cannot meet the original requirement.
Activity-only programs. The alternative kicks in if the activity is medically inadvisable or unreasonably difficult because of a medical condition.
Outcome-based programs. The alternative must be offered to anyone who cannot meet the initial outcome regardless of an underlying medical condition.
The alternative must be genuinely achievable. Plans can choose reasonable documentation requirements, like a doctor’s note for certain modifications, but they cannot create unnecessary hurdles. The goal is to keep the incentive tied to improving health, not to shut people out.
The RAS is required for a wellness program to comply with the Americans with Disabilities Act (ADA) which requires employers to provide reasonable accommodations to qualified employees with disabilities so they can access and participate in workplace programs, including wellness initiatives.
When designed carefully, the RAS framework and ADA accommodations work in harmony, creating multiple paths for employees to succeed in achieving a wellness program’s activity-only or outcome-based programs.
Effective Communication of RAS
Even a well‑designed program can stumble on poor communication. Effective notices:
Use clear, simple language.
Explain the standard and the RAS, with an example of how to qualify.
Identify a contact person or unit, with phone and email, if participants have further questions about the wellness program.
Describe any timing rules, like when the surcharge will stop once the alternative is started or completed.
Confirm that, if a doctor says an alternative is appropriate, the plan will honor it.
Clarity helps participants understand their options and keeps the program aligned with nondiscrimination rules.
Tobacco Surcharges & The Bally’s Case
In Bally's an employee challenged a plan’s tobacco surcharge by claiming the employer’s wellness program violated the ERISA non-discrimination and RAS rules. The court upheld the surcharge through a legal analysis that centers on three practical points:
Tobacco cessation incentives are allowed within the wellness‑program framework, provided the program follows the ERISA nondiscrimination guardrails. Plans can use a surcharge for tobacco users or a discount for non‑users, subject to incentive limits that are generally more generous for tobacco‑related standards than for other health measures.
The program provided the required RAS because it did not trap tobacco users with a permanent penalty. Instead, if a participant could not attest to being tobacco‑free, the plan offered an alternative path—such as enrolling in and completing a tobacco cessation program—to avoid or end the surcharge.
The plan’s communications and administration were consistent with the ERISA and ADA requirements because the materials informed participants about the tobacco surcharge, explained the reasonable alternative and how to access it, and provided a clear opportunity each year to qualify. The program’s structure appeared reasonably designed to promote health (helping people quit tobacco) rather than to punish a health condition.
In short, the surcharge passed muster because it was part of a well‑designed, clearly communicated, and law‑compliant tobacco wellness program that included meaningful alternatives.
Bringing it all together
ERISA puts structure around employer health plans. HIPAA and the ACA add specific nondiscrimination rules to ERISA for wellness programs, balancing the desire to encourage healthy behavior with the need to treat people fairly - regardless of health status or disabilities subject to the ADA.
The RAS is the linchpin: it ensures that those who cannot meet an initial standard still have a genuine way to earn the reward. The ADA adds a parallel obligation to make reasonable accommodations so employees with disabilities can access and benefit from wellness programs.
The Bally’s decision underscores that a tobacco surcharge can be lawful when it lives inside this framework: (1) limits on incentive size, (2) reasonable alternatives for those who don’t meet the outcome, (3) clear and timely communications, and (4) a design aimed at improving health rather than penalizing health status.
