Permissible size of reward to get employees to quit smoking will increase in 2014
Issue:

Your company sponsors a group health plan. The annual premium for employee-only coverage is $6,000 (of which the employer pays $4,500 per year and the employee pays $1,500 per year). In 2014, the plan will offer employees a tobacco prevention program. Employees who have used tobacco in the previous 12 months and who are not enrolled in the plan’s tobacco cessation program would be charged a $1,000 premium surcharge (in addition to their employee contribution toward the coverage). (Those who participate in the plan’s tobacco cessation program would not be assessed the $1,000 surcharge.) Does this program meet the reward standard of HIPAA’s nondiscrimination rules, including the Patient Protection and Affordable Care Act (PPACA) amendments to the rules?
Answer:    

Yes, the program satisfies the reward standard because the reward for the wellness program (absence of a $1,000 surcharge) does not exceed 50 percent of the total annual cost of employee-only coverage, $3,000 ($6,000 × 50% = $3,000).

In November 2012, the Departments of Health and Human Services (HHS), Labor, and the Treasury jointly released proposed rules on nondiscriminatory wellness programs in group health coverage pursuant to PPACA. The proposed regulations replace the wellness program provisions of the HIPAA nondiscrimination regulations issued in 2006. The proposed rules would apply to both grandfathered and non-grandfathered group health plans and group health insurance coverage for plan years beginning on or after January 1, 2014.

Size of reward increased. The proposed regulations would increase the maximum permissible reward under a health-contingent wellness program offered in connection with a group health plan (and any related health insurance coverage) from 20 percent to 30 percent of the cost of coverage. The proposed regulations would further increase the maximum permissible reward to 50 percent for wellness programs designed to prevent or reduce tobacco use.

Health-contingent wellness programs are programs that require an individual to satisfy a standard related to a health factor to obtain a reward. Programs that provide a reward to those who do not use, or decrease their use of, tobacco are health-contingent programs.

Source: Proposed IRS Reg. §54.9802–1(f)(3)(ii)(A) and (B), Example 2.
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