By: HUB’s EB Compliance Team

Perhaps in response to a wave of recent litigation, the U.S. Departments of Labor (“DOL”), Health and Human Services (“HHS”), and the Treasury (collectively, the “Departments”) recently issued guidance related to wellness programs (“FAQ Part 74”). The guidance addresses a long-simmering question under the wellness program nondiscrimination rules: whether an employee who satisfies a reasonable alternative standard (“RAS”) after the beginning of the plan year must receive a reward retroactive to January 1, or only prospectively, from the date the standard is met.

Regulatory Background

Under HIPAA — and later the Affordable Care Act (“ACA”) group health plans are prohibited from discriminating against participants based on a health factor, subject to an exception for bona fide wellness programs. Under the Departments’ 2013 final rules, a health-contingent, outcome-based wellness program (such as a tobacco-use surcharge) must offer a “reasonable alternative standard” (commonly a tobacco cessation course) and must make the “full reward” available to any participant who satisfies that alternative. The regulations cap such rewards at 30 percent of the cost of coverage generally, and 50 percent for programs targeting tobacco use.

The confusion stems from a mismatch between preamble language and regulatory text. The preamble to the 2013 final rules stated that a participant who completes the alternative standard partway through the year should receive the same full reward as someone who met the initial standard from day one — language that plaintiffs have read as requiring retroactive reimbursement of surcharges already paid. The regulatory text itself does not expressly impose a retroactivity requirement. Instead, it appears to allow the reward to apply prospectively, or when the participant satisfies the conditions of the wellness program or RAS, and FAQ Part 74 confirms this gap explicitly.

What FAQ Part 74 Provides

FAQ Part 74 addresses two discrete issues that have driven the current litigation:

  1. Prospective reward allowed: The Departments state they will not take enforcement action against a plan or issuer that provides the wellness program reward only prospectively provided the plan otherwise satisfies the wellness program regulations. HHS has also encouraged states with primary enforcement authority over insured plans to take an approach consistent with this posture.
  2. Disclosure scope: The FAQ clarifies that the required notice of the availability of a RAS applies to plan materials that describe the terms of a health-contingent wellness program, but not to materials that merely mention the program’s existence without describing its terms, such as a Summary of Benefits and Coverage. Notably, the enforcement relief does not change the underlying requirement that a wellness program be reasonably designed to promote health or prevent disease, nor does it excuse plans from providing a reasonable alternative standard or from disclosing the wellness plan where required. It also does not amend the 2013 final rules; it is a statement of enforcement discretion, not a change to the regulatory text.

The Tobacco Surcharge Litigation Backdrop

FAQ Part 74 was issued directly in response to numerous ERISA class actions filed against employers over tobacco premium surcharges, generally alleging that the wellness programs did not provide the “full reward” (through retroactive reimbursement) and did not adequately disclose the reasonable alternative standard, including that a participant’s physician recommendations would be accommodated. Many complaints also allege that collecting and retaining surcharge proceeds constitutes a breach of ERISA fiduciary duty.

Court outcomes have been mixed and are still developing. In Williams v. Bally’s Management Group, LLC, the U.S. District Court for the District of Rhode Island became the first court to dismiss such a claim outright. More recently, on July 22, 2026, two federal district courts reached similar results on different grounds: in Williams v. Target Corporation the court found the plan’s summary plan description already provided for retroactive reimbursement as a matter of plan interpretation, and separately held that ERISA does not require the physician-accommodation notice that DOL’s regulations impose. In Spencer v. Campbell Soup Company, the court held that the statutory term “full reward” guarantees parity in the ultimate reward but does not itself mandate retroactive reimbursement. It separately found the plaintiff lacked standing because he had never enrolled, or attempted to enroll in the cessation program. Both courts declined to defer to DOL’s interpretation of the 2013 rules in light of the 2024 Supreme Court decision in Loper Bright Enterprises v. Raimondo reasoning that a general grant of rulemaking authority does not permit an agency to impose disclosure obligations beyond those Congress specified in the statute.

Not every case has gone the employer’s way. A federal court in Tennessee recently declined to dismiss a similar tobacco surcharge suit against Cracker Barrel, finding the plaintiff had adequately pleaded that the wellness program failed to satisfy applicable requirements, and earlier decisions in other tobacco surcharge cases denied motions to dismiss on both standing and fiduciary-duty theories. Dispositive motions remain pending in more than a dozen additional cases.

Implications for Plan Sponsors

FAQ Part 74 gives plan sponsors more room to administer wellness program rewards prospectively, without fear of a DOL enforcement action.  It also confirms that disclosure obligations do not extend to summary materials that merely reference a wellness program’s existence. That said, this FAQ is agency enforcement guidance only, not a change in the underlying regulatory text, and it is not binding on courts. Private litigation is likely to continue and remains a risk for plan sponsors.

Employers should also bear in mind that enforcement relief applies only to the retroactivity question. It does not relax the requirement to offer a genuine reasonable alternative standard, to design the program to promote health rather than to shift cost, or provide the disclosures that FAQ Part 74 confirms are still required for materials describing the program’s terms.

Action Items

  1. Review plan documents and summary plan descriptions for any language that commits to retroactive reimbursement; if so, that commitment still governs regardless of the enforcement relief, unless the employer amends its wellness program to have the reward operate on a prospective-only basis.
  2. Confirm that all materials describing the terms of a health-contingent wellness program (open enrollment guides, plan documents, surcharge notices) include the required reasonable alternative standard disclosure, plan contact information for obtaining the RAS and accommodation of physician recommendations. Also confirm that materials merely referencing the program without describing its terms are not treated as the wellness program disclosure.
  3. Confirm the wellness program is reasonably designed to promote health or prevent disease and is not serving as a means to shift costs based on a health factor.
  4. Monitor developments in the tobacco surcharge litigation, as outcomes continue to vary by jurisdiction and by the specific plan language and standing facts at issue.

Conclusion

FAQ Part 74 offers welcome, if limited, relief on the central issue driving tobacco surcharge litigation, but it does not resolve the underlying legal questions or eliminate private litigation risk. Plan sponsors that maintain tobacco surcharges or other health-contingent wellness programs should use this guidance to review plan language, disclosures, and program design, and should not assume the litigation exposure has passed. Further agency guidance or appellate decisions may follow as this area continues to develop.

If you have any questions, please contact your HUB advisor. View more compliance articles in our Compliance Directory.

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Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.