Wellness Programs under the Patient Protection and Affordable Care Act

By Kristi R. Gauthier, Esq.
Clark Hill PLC

October 1, 2013 – Even HIPAA Wellness Programs are impacted by the Patient Protection and Affordable Care Act (PPACA). The final regulations issued by the Departments of Health and Human Services, Labor and Treasury update the existing HIPAA wellness program rules and are applicable for plan years beginning on or after January 1, 2014.

Overview of HIPAA Wellness Plan Requirements as Revised by PPACA
Under HIPAA, wellness programs are broken down into two main categories:

•    Participatory Programs: none of the conditions to obtain the wellness program reward are based on an individual satisfying a health standard. These types of programs are not required to satisfy the HIPAA wellness rule requirements discussed below. (Examples: reimburse for fitness membership costs, reward to participate in diagnostic testing not based on outcomes, reward for attending an educational seminar, etc.)

•    Health-Contingent Programs: requires an individual to satisfy a standard related to a health factor in order to obtain a wellness program reward. These can be either “activity-based” where an individual is required to complete an activity related to a health factor but does not require a specific outcome (examples: walking, diet, exercise programs, etc.) or “outcome-based” where an individual is required to attain or maintain a specific health outcome (examples: reward for not smoking, attaining certain results on a biometric screening, maintaining a healthy BMI, etc.).

In general, the HIPAA nondiscrimination rules prohibit a group health plan from discriminating against an individual based on a health factor. An exception to this general rule is if there is a wellness program in place that satisfies the following five requirements:

1. The reward/incentive cannot be more than 20% of the total cost of coverage (employer and employee costs) for the benefit package in which the employee is receiving coverage. Under PPACA, in 2014 this amount is increased to 30% of the total cost of coverage for non-tobacco wellness program rewards and up to 50% for programs that are designed to prevent or reduce tobacco use.

2. The program must be reasonably designed to promote health and prevent disease. (According to the DOL, this means that the program should have a reasonable chance of improving health or preventing disease in individuals, not be overly burdensome, not be a “subterfuge” for discriminating based on a health factor, and not be highly suspect in the method chosen to promote health or prevent disease. This is a facts and circumstances determination.)

3. Individuals must be given an opportunity to qualify for the reward at least once per year.

4. For activity-based wellness programs, the program must provide a reasonable alternative method for individuals for whom it is unreasonably difficult or medically inadvisable to meet the initial standard. For outcome-based programs, the program must provide a reasonable alternative for anyone who failed to meet the initial health standard, regardless of medical reason.

• Individuals who are given an alternative must be able to earn the same, full reward as those who meet the initial standard, even if it takes those under the alternative more time.
• Programs have flexibility to determine whether to provide the same alternative to an entire class of individuals or to provide on an individual basis.
• Programs do not need to determine the alternative in advance of a request for an alternative standard.
• Employer may seek physician verification of the need for a reasonable alternative only under an activity-based wellness program.

5. Plan materials describing the terms of the program must describe the availability of a reasonable alternative standard to qualify for the reward. The plan materials addressing an activity-based wellness program must also include contact information and a statement that an individual’s personal physician’s request/opinion will be accommodated.

If these five criteria are satisfied, the wellness program will be considered nondiscriminatory under HIPAA.

Interaction of Wellness Plan Incentive Rules and PPACA Affordability Standards
Under PPACA, in order for an employer to avoid potential penalties under the employer shared responsibility provisions in 2015 and beyond, employers must offer “affordable” and “minimum value” coverage to at least 95% of its full-time employees. For these purposes, “affordable” means that the employee’s share of the self-only premium for the employer’s lowest cost plan that provides minimum value does not exceed 9.5% of the employee’s household income. Alternatively, in lieu of using an employee’s household income to determine affordability, an employer may elect to use one of three IRS safe harbors (the employee’s W-2 wages, the employee’s rate of pay, or the federal poverty level for a single individual).

The IRS has recently issued a Notice of Proposed Rulemaking addressing various issues, including the interplay between wellness plan incentives/rewards and PPACA affordability standards. The IRS indicated that wellness incentives tied to the reduction or prevention of tobacco use may be counted when determining affordability. However, other wellness incentives, such as incentives for completing health risk assessments, meeting health targets, undergoing annual wellness exams, etc. may not be counted when determining affordability. The preamble to the Notice of Proposed Rulemaking states:

“The proposed regulations provide that the affordability of an employer-sponsored plan is determined by assuming that each employee fails to satisfy the requirement of a wellness program, except the requirements of a nondiscriminatory wellness program related to tobacco use.”

Therefore, there is a stronger incentive for employers to implement tobacco-based incentives as those can actually increase the likelihood of satisfying PPACA affordability standards.

What Should Employers Be Doing?
While the basic structure of HIPAA wellness programs remain the same, PPACA has imposed some significant changes. Employers who currently offer a wellness program should review the terms of the program to ensure that it will satisfy the new PPACA requirements beginning in 2014. Whether employers currently offer a wellness program or are considering offering a wellness program as part of its benefits package, employers should work closely with their benefits consultants and legal counsel to ensure that the program is structured in a way to satisfy the applicable rules. Noncompliant plans could be subject to penalties under PPACA of up to $100 per day, and could also be subject to enforcement actions by the Department of Labor.

* This article is not intended to give legal advice. It is comprised of general information. Employers facing specific issues should seek the assistance of legal counsel.

Kristi R. Gauthier is a senior attorney in Clark Hill’s Birmingham office and concentrates her practice in Employee Benefits Law. Kristi has represented clients in a wide variety of employee benefits issues involving health and welfare benefits, as well as retirement plans. Kristi is admitted to practice in the State of Michigan, the U.S. District Court for the Eastern District of Michigan, and the U.S. Sixth Circuit Court of Appeals. She also is active in the legal community with memberships in the American Bar Association, the State Bar of Michigan, and the Oakland County Bar Association where she is a member of the Employee Benefits Committee. Kristi also serves as a member of the Clark Hill Diversity and Inclusion Committee. Kristi has lectured on various employee benefits issues, including ERISA compliance, healthcare reform, COBRA, section 125 plans, 403(b) plans and IRS plan correction programs. Kristi is also a co-author of the ABA publication ERISA Survey of Federal Circuits. Kristi was named a “Rising Star” by Michigan Super Lawyers in 2011.