By: HUB’s EB Compliance Team

In 2025, HUB wrote about a recent wave of litigation targeting tobacco surcharges in wellness programs. This litigation focused on alleged discrimination based on health factors (specifically tobacco use) and whether employers properly offered and communicated Reasonable Alternative Standards ("RAS"). In this latest update, a federal court addressed the critical question of what constitutes a "full reward" under applicable ERISA regulations.

Case Background

In Williams v. Bally's Management Group, LLC, the plaintiff — a participant in Bally's Management Group's employee welfare benefit plan — alleged that the plan's $65 monthly tobacco surcharge violated ERISA's non-discrimination provisions. Williams claimed the wellness program failed to comply with federal requirements in two specific ways:

  1. The plan allegedly did not provide retroactive reimbursement of surcharges paid before a participant completed the tobacco cessation program; and
  2. Plan materials provided insufficient notice about reasonable alternative standards and physician accommodation.

The plan offered a tobacco cessation program with expenses fully covered, which would eliminate the surcharge upon completion.

Wellness Programs

Under the most recent final regulations, health contingent programs must meet the following five requirements.

  1. The program must give individuals eligible to participate the opportunity to qualify for the reward at least once per year.
  2. The total reward for all the plan's wellness programs that require satisfaction of a standard related to a health factor is limited — generally, it must not exceed 30 percent (or 50 percent for programs designed to prevent or reduce tobacco use) of the cost of employee-only coverage under the plan. If dependents (such as spouses and/or dependent children) have the option of participating in the wellness program, the reward must not exceed 30 percent (or 50 percent) of the cost of the coverage in which an employee and any dependents are enrolled.
  3. The program must be reasonably designed to promote health and prevent disease.
  4. The full reward must be available to all similarly-situated individuals. This means the program must allow a reasonable alternative standard to completing the program as written (or a waiver of the otherwise applicable standard).
  5. The plan must disclose in all materials the terms of the program and the availability of a reasonable alternative standard (or the possibility of a waiver of the otherwise applicable standard).

Based on the allegations in this case, items 4 and 5 were the chief concerns.

Communication of the RAS

Williams argued that the plan's communication regarding RAS availability was insufficient because the benefits guide did not include all required information about the reasonable alternative standard. The court rejected this argument, finding that the guide "merely mentioned" the program's existence. This distinction is significant because 29 C.F.R. § 2590.702(f)(4)(v) expressly provides: "If plan materials merely mention that such a program is available, without describing its terms, this disclosure is not required."

The court also found that the Summary Plan Description ("SPD") did contain the required disclosure language. In effect, Bally's had satisfied the communication requirements through the SPD, and the benefits guide's silence on these details was immaterial since no disclosure was required in materials that merely mentioned the program without describing its terms.

The Full Reward

Williams next argued that the plan failed to provide the "full reward" as required by ERISA. Her argument centered on language in the benefits guides stating that the tobacco surcharge would be eliminated "[u]pon completion of the applicable program" without any express provision for retroactive reimbursement. She contended this silence meant the plan provided the reward only prospectively — going forward from the date of program completion.

Bally's countered that the statutory language requiring a "full reward" does not explicitly mandate retroactive reimbursement of previously paid surcharges. The court agreed with this interpretation, holding that prospective elimination of the surcharge satisfied the "full reward" requirement as a matter of law.

This holding is significant because it directly contradicts the position taken in the preamble to the Department of Labor's (“DOL”) final regulations, which describes "full reward" as requiring retroactive reimbursement for the entire plan year. The DOL has also advocated for mandatory retroactive reimbursement in its ongoing enforcement action, Secretary of Labor v. Macy's, Inc.

The Future of Full Rewards

The fact that the Williams court reached a different conclusion than the DOL does not mean retroactive reimbursement is no longer advisable. Several important caveats warrant careful consideration.

First, this is only a district court decision from the District of Rhode Island (within the First Circuit). The ruling is not binding precedent outside the First Circuit and may be appealed. Second, this decision potentially sets the stage for a circuit split if courts in other circuits adopt the DOL's contrary interpretation. Circuit splits on important statutory questions often prompt Supreme Court review to resolve the conflicting positions.

Third, the DOL may continue pursuing its interpretation in enforcement actions regardless of this decision, creating ongoing compliance risk for employers who rely solely on Williams. Fourth, the proliferation of private class action lawsuits targeting tobacco surcharge programs means employers face litigation exposure even where their programs prospectively eliminate surcharges.

Conservatively, plans seeking to minimize litigation risk should continue providing retroactive reimbursement to participants who complete wellness programs during the plan year. Plans considering prospective-only rewards should consult with experienced ERISA counsel to assess jurisdiction-specific risks and the potential for regulatory enforcement.

Conclusion

Wellness programs have grown increasingly complex in recent years, with compliance requirements varying significantly based on program design. This makes careful compliance planning essential when implementing or modifying wellness programs. Cases like Williams demonstrate that litigation exposure persists even when employers make good-faith efforts to satisfy regulatory requirements. Given the unsettled state of the law regarding "full reward" and the DOL's contrary enforcement position, employers should approach tobacco surcharge programs with heightened caution and proactive legal review.

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

NOTICE OF DISCLAIMER

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.