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On August 22, 2017, the District Court for the District of Columbia determined that recent Equal Employment Opportunity Commission (EEOC) regulations governing wellness program incentives are “arbitrary and capricious,” and remanded the regulations back to the EEOC for further consideration. The ruling is significant because the court determined that the EEOC regulations are too permissive. If the EEOC modifies the regulations, the new regulations will probably give employers less flexibility to provide wellness program incentives.

The EEOC may appeal the decision, and the regulations remain in effect for the time being. In fact, the court acknowledged that vacating the regulations would cause “potentially widespread disruption and confusion” because employers have already designed and implemented wellness incentives in reliance on the new regulations.

On September 21, 2017, the EEOC submitted a status report in accordance with the court’s order. The status report clarified that the EEOC intends to issue a notice of proposed rulemaking by August 2018 and a final rule by October 2019. The EEOC further explained that any substantive changes included in the new rule would likely not become effective until the beginning of 2021, at the earliest. This will give employers time to tailor their wellness incentives to the new standards.

In the meantime, employers should monitor the EEOC’s progress, and think carefully before designing new wellness programs that rely on the current regulations to provide significant incentives. Additionally, wellness program sponsors should be mindful of the potential impact this case will have on participant-driven lawsuits.

Wellness programs must comply with the Health Information Portability and Accountability Act (HIPAA) (as modified by the Affordable Care Act), the Americans with Disability Act (ADA), and the Genetic Information Nondiscrimination Act (GINA). HIPAA prohibits discrimination against program participants. The ADA and GINA prohibit employers from collecting protected medical and genetic information from employees unless the disclosure is voluntary. The EEOC regulations apply only to the ADA and GINA.

Under the EEOC regulations, the rewards or penalties provided through a wellness program cannot exceed 30% of the cost of self-only coverage. The AARP argued, and the court agreed, that incentives of up to 30% effectively require program participants to disclose protected information to qualify for reduced premiums and, therefore, such disclosure is not actually voluntary. Moreover, because disabled individuals tend to have lower incomes, a 30% reduction or increase in premiums would actually be more coercive to the class of individuals that the ADA was designed to protect.

The EEOC’s primary defense was that the 30% cap harmonizes its regulations with the HIPAA regulations governing wellness programs. The court rejected this argument because the EEOC regulations fail to align with the HIPAA regulations on a number of key points. For example, the EEOC regulations apply to both participatory and health-contingent wellness programs, while the HIPAA regulations apply only to health-contingent programs. HIPAA also caps the incentive or penalty at 30% of the total cost of coverage (potentially including family coverage), whereas the EEOC regulations cap the incentive or penalty at 30% of the cost of self-only coverage.

The court also emphasized the EEOC’s failure to adequately explain its decision to construe the term “voluntary” to permit the 30% incentives. The court explained that neither the agency’s decision nor its final rules contain any concrete data, studies, or analysis of the appropriate incentive level. The court further noted that it would “likely be a different case” if the administrative record contained support for and an explanation of the agency’s decision.

Given all of these competing considerations, the end result may be an overall reduction in wellness incentives, and larger insurance premiums for many employees.

Legislation introduced earlier this year in the House of Representatives would exempt wellness programs offered in conjunction with an employer-sponsored health plan from various ADA and GINA requirements. The House has not yet voted on this bill, and the bill’s prospects remain unclear.