Final Regulations Provide Roadmap for Employer-Sponsored Wellness Programs
This May, the IRS, the Department of Health and Human Services, and the Department of Labor jointly issued final regulations on the design of wellness programs. The regulations apply to group health plans (both insured and self-insured) and to group health-insurance issuers.
Wellness programs are voluntary, and they are becoming increasingly popular. The requirements of the final regulations will not apply until plan years beginning on or after January 1, 2014, but the issuance of the regulations should encourage employers who are designing (or redesigning) wellness programs for their employees, the IRS and the other agencies predicted.
The Health Insurance Portability and Accountability Act of 1996 prohibits group health plans and issuers from discriminating against individual participants and beneficiaries in eligibility, benefits, or premiums based on a health factor. HIPAA prohibits discrimination based on: health status, medical condition, claims experience, receipt of health care, medical history, genetic information, evidence of insurability, and disability. However, the law allows premium discounts, rebates, or modifications to cost-sharing amounts, including copayments, deductibles, and coinsurance, in return for adhering to programs of health promotion and disease prevention (so-called “wellness” programs). The wellness-program exception and the final regulations apply to all group health plans that offer wellness programs, including grandfathered and non-grandfathered plans.
Scope of Regulations
The regulations divide wellness programs into participatory wellness programs and health-contingent wellness programs. Plans and issuers with health-contingent wellness programs are permitted to vary benefits, premiums or contributions based on whether an individual met the standards of a wellness program. The regulations further divide health-contingent programs into activity-only programs and outcome-based programs. The regulations also describe the reasonable alternatives that wellness programs must offer to avoid violating health plan non-discrimination rules.
Participatory programs either do not provide a reward or do not include any condition for obtaining a reward based on a standard related to a health factor. The final regulations do not impose any additional standards on participatory programs.
Participatory programs comply with the non-discrimination requirements as long as participation is made available to all similarly-situated individuals, regardless of health status. This ensures that the general HIPAA prohibition against discrimination based on a health factor is not implicated. Distinctions are allowed based on employment classifications, consistent with the employer’s usual practice. Unlike health-contingent programs, there is no limit on the financial incentives provided for participatory wellness programs.
Examples of participatory programs include:
• reimbursement for all or part of the cost of a fitness membership;
• a diagnostic testing program that rewards participation, and does not base any reward on test outcomes;
• a program that reimburses costs of participating, or provides a reward for participating, in a smoking-cessation program, regardless of whether the employee quits smoking; and
• a program that rewards employees who complete a health-risk assessment, without requiring any further action.
A health-contingent wellness program requires an individual to satisfy a standard related to a health factor before a reward is obtained. An important change in the regulations increases the maximum permissible reward under a health-contingent program from the prior 20-percent limit to 30 percent of the cost of coverage (50 percent if the additional amount is for programs designed to prevent or reduce tobacco use).
Unlike participatory programs, the regulations impose five requirements for health-contingent programs, applicable to both activity-only and outcome-based programs:
• individuals must have an opportunity to qualify for the reward at least once a year.
• the total reward cannot exceed the specified limits.
• the program must be reasonably designed to promote health or prevent disease.
• the program must be available to all similarly situated individuals. A reasonable alternative standard (or a waiver) must be made available to any individual for whom it is unreasonably difficult, due to a medical condition, to satisfy the standard.
• the plan must disclose the availability of alternatives to qualify for the reward (or a waiver).
A program is reasonably designed if it has a reasonable chance of improving health, is not overly burdensome, and is not a subterfuge for discrimination. Reliance on studies or evidence is not required, but is encouraged as a best practice. The regulations are designed to provide flexibility and encourage innovation and experimentation. An outcome-based program must provide a reasonable alternative to individuals who do not meet the initial standard.
The final regulations do not address the tax consequences of wellness programs. According to IRS officials, the benefits provided to employees will be taxable or tax-free under general tax principles, including the fringe-benefit rules.