The Departments of Labor, Treasury and Health and Human Services (the “Departments”) recently published final Affordable Care Act (“ACA”) regulations on wellness programs, effective in 2014. The regulations retain the existing distinction between participatory and health-contingent wellness programs, but clarify that many wellness programs have been incorrectly classified as participatory. The regulations also split health-contingent wellness programs into two subcategories subject to new requirements. While reviewing programs for consistency with these regulations, plans must simultaneously track state and Equal Employment Opportunity Commission regulatory efforts.

Right now, health care cost containment is a top priority for employers, employees and the Departments. In this environment, attention has inevitably turned to employer wellness programs and their potential for improving employee health, reducing long-term costs and providing immediate returns on investment. A recent RAND Corporation report confirms this trend, finding that more than 60% of employers with 100 or more employees sponsor a wellness program.

As explained in our December 2012 client alert,1 wellness programs must comply with a variety of federal laws. Chief among these is the Health Insurance Portability and Accountability Act (“HIPAA”), which established wellness programs as an exception to the general rule that group health plan’s terms of coverage may not vary based on participants’ health. The ACA expanded upon the HIPAA nondiscrimination rules and wellness exemption. The Departments’ new wellness regulations reflect these ACA updates and lay out specific wellness program requirements for all plan years starting on or after January 1, 2014.

Wellness Program Incentives and Pay-or-Play

Many wellness programs provide rewards or impose surcharges on health plan participants in order to incentivize improved health habits. Under the final regulations, these rewards (or surcharges) can take the form of cash, gift cards or adjustments to participant health plan costs (e.g., premium or deductible reductions, copayment waivers).

Although wellness programs directly affect the actual cost of health care for many employees, wellness rewards (and surcharges) will generally be disregarded in determining affordability and minimum value under the employer’s health plan for purposes of the shared responsibility (i.e., “pay-or-play”) rules under section 4980H(b) of the Internal Revenue Code of 1986, as amended. In separate regulations, the Department of Treasury has proposed a lone exception, under which tobacco-related wellness rewards will be presumed earned for affordability and minimum value calculations.