After years of confusing and sometimes contradictory signals (described in previous posts here and here), the Equal Employment Opportunity Commission has finally proposed a regulation explaining how employment-based wellness programs can satisfy the Americans with Disabilities Act. Employers will welcome some features of the new guidance: the proposed regulation allows incentives; it acknowledges that incentives are permissible regardless of whether they are structured as rewards or penalties; and it adopts incentive limits that are at least similar to (although unfortunately not identical with) the limits already permitted by regulations interpreting the HIPAA nondiscrimination requirement.

Incentive Limits for Participatory Programs

In at least one respect, though, the EEOC’s proposed regulation is likely to harm existing wellness programs. Employers have found that programs designed to raise employees’ awareness of adverse health conditions are among the most effective tools to promote better health in the workplace. These programs offer employees incentives to participate in health awareness activities—such as health risk assessments or biometric screenings—without requiring the employees to perform a physical activity or achieve a health goal in order to earn the incentives.

Under the existing HIPAA regulations, these “participatory” wellness programs are not subject to incentive limits. As long as the program is available to all similarly-situated individuals, it is permissible. In contrast, the proposed EEOC regulation would impose incentive limits on participatory programs. If the proposed EEOC rule is adopted, an employer will not be permitted to offer an incentive with a value greater than 30% of the cost of self-only coverage to encourage employees to participate in health awareness activities.

This difference is partly attributable to the different statutory requirements. HIPAA prohibits discrimination based on health status. Because participatory programs are not status-based—the incentive is available to anyone who participates, regardless of health status—the programs do not involve issues that the HIPAA statute addresses. The Americans with Disabilities Act casts a wider net: it generally prohibits employers from obtaining medical information from employees (with narrow exceptions for job-related information) unless the employee provides the information voluntarily. The incentive limit reflects the EEOC’s view that if the employee pays too high a price for refusing to provide personal health information, participation in the health awareness program is no longer “voluntary.”

Problems for Combined Wellness Programs

Employers are familiar with the 30% incentive limit as it applies under the existing HIPAA regulations to “health-contingent” wellness programs. Health-contingent programs require an employee to complete a physical activity (such as diet or exercise) or achieve a health goal (such as losing weight or lowering cholesterol) in order to earn the incentive. Until now, though, participatory wellness programs have not been subject to explicit incentive limits. As a result, employers have reasonably assumed that they could offer additional (and perhaps larger) incentives for employees to engage in health awareness activities.

The EEOC’s proposed regulation not only would impose the 30% limit on participatory wellness programs, it also would provide that all wellness incentives combined could not exceed the 30% limit. An example in the proposed regulation illustrates this point. If the annual cost of self-only health coverage is $5,000, an employer could not offer an employee $250 for filling out a health risk assessment and $1,500 for completing a health-contingent program, because the sum of the two rewards would be 35% of the cost of self-only coverage (even though each reward separately satisfies the 30% limit). Employers that combine health awareness incentives with other wellness incentives would have to design their wellness programs to meet the new combined limit.

Problems for Gateway Programs

Employers increasingly use health awareness programs as “gateway” conditions to more comprehensive levels of health coverage. For example, an employer might offer a “silver” level of health coverage to all employees, and might offer a more expensive “gold” level of coverage (with lower deductibles or enhanced benefits) to employees who agree to complete a health risk assessment or undergo health screenings. An employee who declines to participate in the health awareness program is eligible only for the “silver” coverage, but pays the same amount that a health-awareness participant would pay for that coverage.

The EEOC’s proposed regulation appears to prohibit all gateway programs (although the proposal is not entirely clear on this point). In order to qualify as a “voluntary” program under the proposed regulation, a wellness program must not deny coverage under any group health plan or health benefit package based on an employee’s refusal to participate in health awareness activities. Accordingly, it appears that an employer may charge the non-participant 30% more for the same health coverage, but the employer may not offer the non-participant coverage that is slightly less valuable (even if the non-participant’s coverage also costs less).

To the extent that the EEOC’s proposed regulation focuses exclusively on cost-based incentives, it is likely to work to the disadvantage of employers and employees alike. By apparently prohibiting health awareness programs that serve as gateways to more valuable coverage, the proposed regulation removes a design feature that some employers have found to be more acceptable to their employees than a premium differential or a reward separate from the health plan. In our earlier example, an employee who does not wish to participate in health awareness activities might prefer to receive “silver” coverage at lower cost (particularly if this is the coverage level the employee would have chosen anyway) rather than to be offered only “gold” coverage but charged 30% more than participating employees pay for the same coverage.

Problems for Family Programs

If an employee enrolls in family coverage, some employers offer an incentive for the employee’s spouse or dependents to participate in health awareness activities. Under the HIPAA regulations, if an employee’s family members can participate in a health-contingent wellness program, the employer may offer an incentive up to 30% of the value of family coverage.

In contrast, the incentive limit under the EEOC’s proposed regulation appears to be capped at 30% of the cost of self-only coverage, even if the employee has family coverage and offers incentives to the employee’s family members to participate in the health awareness program.   The EEOC has raised separate concerns under the Genetic Information and Nondiscrimination Act with respect to incentives that are conditioned on a family member’s participation in a health awareness program; a footnote in the preamble of the proposed regulation says that the EEOC will address this issue in future rulemaking. As a result, the status of family incentives is, at best, uncertain.

Problems With the Effective Date

The EEOC’s proposed regulation does not include an effective date. The EEOC has been roundly criticized for initiating enforcement actions under the Americans with Disabilities Act without clearly articulating the rules that apply to wellness programs. It is puzzling that the proposed regulation does not at least state that it is intended to interpret the statute prospectively, and that employers will not face liability for failing to guess the applicable rules before the EEOC publishes a final regulation. One hopes that the EEOC will repair this omission.

Employers that use health awareness activities as an integral part of their group health plans will need an extended period after the EEOC publishes a final regulation to review and adjust plan designs, modify administrative systems, and develop employee communications in advance of open enrollment. Employers will not be able to implement significant changes in their health awareness programs in the middle of a plan year or shortly before a new open enrollment period begins. The EEOC’s proposed regulation does not address these difficulties.

Importance of Public Comments

Comments on the EEOC’s proposed regulation are due by June 19. The EEOC is an independent agency whose commissioners represent a wide range of political and policy perspectives. Unlike the Labor Department and Internal Revenue Service, which have extensive regulatory authority over employee benefit plans, the EEOC deals with employee benefit plans only infrequently and has less understanding of how these plans are designed and administered. As a result, it will be particularly important for employers to make their concerns known to the EEOC if the proposed regulation would adversely affect their health awareness programs.

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Photo of Amy N. Moore Amy N. Moore

Amy Moore advises public and private companies and tax exempt organizations on a wide range of tax, ERISA, and employment law issues concerning all types of benefit programs.  Ms. Moore counsels some of the world’s largest multinational companies on the design and implementation…

Amy Moore advises public and private companies and tax exempt organizations on a wide range of tax, ERISA, and employment law issues concerning all types of benefit programs.  Ms. Moore counsels some of the world’s largest multinational companies on the design and implementation of innovative benefit strategies, including the restructuring of retirement programs to meet the needs of the modern work force; the use of surplus pension and insurance assets to provide non-traditional benefits; and the establishment of funding and security arrangements for welfare plans and executive compensation.  She represents clients in connection with pension fund investments in private equity funds, hedge funds, group trusts, and derivatives.  She also advises on benefits and compensation issues in acquisitions and divestitures, debt finance, joint ventures, and other corporate transactions.  Ms. Moore represents companies in audits and contested agency proceedings involving benefit plans and advises clients on employee benefits issues that arise in connection with ERISA litigation and settlements.  She also counsels employers on issues of plan administration and the correction of operational problems under government-sponsored remedial programs.