The U.S. Equal Employment Opportunity Commission’s (EEOC) recent litigation against employers over incentives granted to employees participating in wellness programs may be a concern for other employers. Specifically, the EEOC has asserted that the size of the incentive that is lost by employees that refuse to participate could render an employer’s wellness program “involuntary” and in conflict with the Americans with Disabilities Act (ADA). Our recent blog post on this issue highlights the concern.

The EEOC’s action raises issues that have confused employers and benefit advisors for many years: What types of wellness program rewards or penalties are acceptable under the ADA? Will programs that comply with other federal laws for employer-sponsored health plans avoid claims of discrimination under the ADA?

The ADA generally prohibits employers from requiring employees to answer disability-related questions or to undergo medical exams (except certain health/safety exams in specific professions or industries). The EEOC, which regulates various ADA provisions, has confirmed that employers may conduct health assessments or exams as part of a voluntary wellness program without violating the ADA. Medical records must be kept confidential and separate from personnel records.

While the EEOC has not published clear guidance as to the meaning of “voluntary” participation, the need for clarification is apparent. The Health Insurance Portability and Accountability Act (HIPAA), has long permitted health plans to make wellness rewards (incentives or penalties) up to certain limits — those limits were increased under the Affordable Care Act (ACA) starting in 2014. These ACA limits may inform strategy on employer implementation of incentives to promote participation in wellness programs.

Penalties and Rewards

The ADA speaks of penalties, but in the vernacular of the ACA, the term “reward” refers both to an incentive payment or a penalty surcharge. Further, the ACA categorizes wellness programs as either “participatory” or “health-contingent” and applies different rules for each category.

Participatory programs do not depend on health status and no specific health outcome is required. For example, a program that rewards all employees that complete a health risk assessment, without regard to the results, is a participatory program. A health-contingent program is one that offers the reward only to employees that either meet an initial health standard (such as satisfactory biometric screenings) or do not meet the initial standard but meet a reasonable alternative standard (such as attending an educational program).

Starting with 2014 plan years, the maximum allowable reward (incentive or penalty) in a health-contingent wellness program under the ACA is 30 percent of the health plan cost, or 50 percent if the program is designed to prevent or reduce tobacco use. (Health plan cost generally is the COBRA rate minus the 2 percent administrative fee.) If the program is merely participatory, however, there is no limit under the ACA for the amount of reward an employer can give an employee.

Regardless of the ACA provisions for wellness programs, the EEOC presently believes that compliance with the ADA prevents employers from offering rewards amounting to steep or enormous penalties — even in a participatory-only program. In its recent case, the EEOC cites the difference between employees paying 25 percent versus 100 percent of the cost for health insurance based on whether they participated in a wellness program as an “enormous penalty.”

Considering the EEOC’s public comments endorsing voluntary wellness programs, and that their enforcement activity is focused on programs imposing penalties that they describe as enormous or steep, it appears likely the use of wellness program incentives will continue to be permitted. However, compliance with the reward limits and reasonable alternatives required under the ACA needs to be complimented with awareness of the EEOC’s concern over excessive penalties. Formal guidance from the EEOC is still pending.

For more information about wellness programs under the ACA, read the Final Rule.