In Williams v. Bally Management Group, LLC, the US District Court for the District of Rhode Island became the first court to grant a motion to dismiss in a class action challenging Bally Management Group’s (Bally) tobacco surcharge wellness program. The court dismissed the plaintiff’s challenge in full, rejecting both the ERISA nondiscrimination claim that the tobacco surcharge violated the “full reward” requirement and the fiduciary-breach claim. This decision is a favorable development for plan sponsors amid the recent surge of class actions targeting tobacco surcharge wellness programs, as discussed in our recent blog post.
Under the Bally’s wellness program, participants who identified as tobacco users were assessed a $65 per-month tobacco use premium surcharge (totaling $780 annually). Participants who completed a Bally-paid tobacco cessation program could have the surcharge removed on a prospective basis.
The plaintiff alleged that the surcharge violated HIPAA’s nondiscrimination rules because the group health plan did not retroactively refund the surcharges previously paid by participants who completed the tobacco cessation program. The plaintiff also contended that the group health plan failed to adequately notify participants of the reasonable alternative standard for earning the full reward. The reasonable alternative standard gives participants an opportunity to obtain the full reward under the tobacco cessation program through an alternative standard, such as completing a tobacco cessation program. Finally, the plaintiff claimed that Bally’s breached its ERISA fiduciary duties by using the surcharge to offset its own plan obligations.
The court dismissed all claims. The court held that neither the statute nor the applicable regulations require retroactive reimbursement of previously paid tobacco surcharges once a participant completes a tobacco cessation program, finding that providing a prospectively waived surcharge was sufficient to satisfy the “full reward” requirement. The court also determined that the health plan’s summary plan description adequately disclosed the reasonable alternative standard because it closely tracked the US Department of Labor’s (DOL’s) model notice language. In addition, the court held that the benefit guides and other supplemental communications were not required to include the full terms of the wellness program, only to inform the participants of the availability of the wellness program.
Finally, the court concluded that the plaintiff lacked standing to pursue the fiduciary breach claims because there was no alleged loss to the plan. The court concluded that the plaintiff’s allegations—that the plan’s retention of the surcharge funds harmed the plan and that Bally’s management enriched itself at the expense of the plan—were entirely speculative.
Plan Sponsor Action Items
While this decision is positive news for plan sponsors, it represents just one federal court’s view. It remains to be seen whether other courts will adopt the same reasoning or whether the ruling will withstand a potential appeal. Plan sponsors should remain diligent in reviewing plan documents and communications, including to:
- Ensure Summary Plan Descriptions (SPD) clearly describe all wellness programs, including tobacco use premium surcharges
- Consider retaining a retroactive refund approach to ensure each participant can earn the full reward for the plan year as additional class actions make their way through the court system
- Include the disclosure of a reasonable alternative standard in the SPD that closely aligns with the DOL’s model language
- Avoid relying exclusively on informal non-SPD materials, such as benefit guides, to satisfy regulatory notice requirements