BENEFITS DIGEST

Three Hard Rock employees say the company’s health plan charged tobacco users $15 a week, $780 over a full year, without offering the full reward for completing a cessation program and without adequate notice that a doctor’s recommendation could substitute, allegations in the same mold as the surcharge suits against other large employers. Free access to a quit program alone doesn’t satisfy the wellness rules, the October 23 complaint argues. Four counts split between the surcharge’s design and the plan’s fiduciaries, seeking relief for a proposed class reaching back six years. How the plan is funded and which plan document governs are expressly unknown to the plaintiffs at this stage, no percentage-cap violation is claimed, and the allegations have not been decided.

The tobacco-surcharge wave reached ADT on October 22. A participant alleges the company’s $100 monthly surcharge violates ERISA’s wellness-program and fiduciary rules because employees who complete a cessation program get the surcharge removed only going forward rather than receiving the full annual reward, and because notice of alternatives was inadequate. The complaint seeks refunds and equitable relief for a proposed class. No court has evaluated the claims.

Comcast is asking a federal court to dismiss claims challenging its health plan’s tobacco surcharge. In Cannon v. Comcast, the company argues that an annual opportunity to enroll in a smoking-cessation program satisfies the applicable requirements, and it disputes the plaintiffs’ demand for retroactive relief. Its brief also says the plan fully reimburses participants who complete the program during the year, whether or not they quit smoking. The filing lays out defenses to the surcharge litigation facing employers. It is not a ruling that Comcast’s program complies with the law.

Judge Stephen Bough granted the certified classes summary judgment on liability on all six counts over the $24-per-week tobacco surcharge in Compass Group’s self-funded health plan, and denied the company’s cross-motion. The order holds that the statutory full reward required refunding the whole plan year’s surcharge once a participant completed the tobacco-cessation alternative, without having to quit successfully. The court also found at least one required disclosure missing from plan materials in each year from 2016 through 2026, and it held that the separately coded surcharge deductions were plan assets Compass commingled with its general assets. The Labor Department’s August FAQ, which reads the regulation more forgivingly, received no deference. The parties agree $47,960,937.87 in surcharges was collected over the decade, and the court has not determined how much must be repaid, ordering damages briefs within 14 days. Different claims also carry different recovery periods. Liability is decided; the number is not.

A former Tenet hospital employee filed a would-be class action in Dallas on October 16 over the $25 per pay period tobacco surcharge, roughly $650 a year, in the company’s self-funded health plan, which the [complaint](https://digest.theinnerfirm.com/docs/jordan-v-tenet-complaint-2026-10-16.pdf) says covered more than 55,000 active participants in 2024. The suit contends the surcharge is premium discrimination based on a health factor that cannot claim the wellness-program exception. The complaint alleges that earlier versions of the program offered no compliant way to earn back the full surcharge. It acknowledges that the 2026 guide introduced cessation-program refunds for the current plan year, but challenges the remaining notice language and says discovery is needed to establish how those refunds work in practice. Fiduciary counts allege Tenet kept the collected surcharges for its own benefit, another point the complaint concedes needs discovery. The proposed class is surcharge payers since October 2020, not the whole plan, and the claims follow a wave of similar surcharge suits.

7-Eleven has agreed to a $2,313,480.87 settlement of Barbara Baker’s challenge to its tobacco surcharges. An October 13 motion asks a federal court in Texas for preliminary approval. Baker alleges the program failed to offer and disclose a compliant alternative that would let participants avoid the full surcharge. The [settlement agreement](https://digest.theinnerfirm.com/docs/baker-7-eleven-settlement-agreement-2026-10-13.pdf) covers unreimbursed charges paid from September 26, 2018, through preliminary approval. Eligible participants would receive automatic checks proportional to their unreimbursed surcharges, after attorneys’ fees and other expenses come out of the fund. Attorneys may request up to 33.33% of the fund in fees, plus costs. 7-Eleven denies wrongdoing.

Baylor Scott & White Health is the latest employer to face a tobacco-surcharge class action. In a complaint filed October 12 in the Northern District of Texas, an employee says the health system’s self-funded medical plan charges tobacco users $30 per person each pay period, up to $60, roughly $780 a year for employee-only coverage. She alleges that the plan’s cessation program, surcharge refunds and disclosures don’t meet the requirements for a lawful tobacco surcharge. The plan’s participant materials say the surcharge applies until an employee completes cessation coaching and submits an affidavit, with no promised refund of amounts already collected, and the complaint says the 174-page summary plan description never mentions the surcharge at all. The suit also adds fiduciary-breach and prohibited-transaction claims over the handling of the withheld dollars, which the plan’s own documents route to a welfare trust. The plan had more than 49,000 active participants at the end of 2024. These are allegations, not findings.

The tobacco surcharge wave reached Mondelez, the snack maker behind Oreo and Ritz, in a complaint former employee Carrie Rusbuldt filed October 9 in Chicago through Siri & Glimstad. Mondelez’s enrollment guides told employees that tobacco users of any kind, e-cigarettes included and no matter how frequent the use, pay an extra $100 a month for medical coverage, and her pay stub shows a Ben Sur Tobacco deduction. The complaint alleges the guides never disclosed the rights that make a surcharge lawful, a reasonable alternative or waiver available to everyone, accommodation of a personal physician’s recommendations, and a path to the full reward for employees who complete the free cessation program. It also presses a self-dealing theory. Because the plan is self-funded, every surcharge dollar allegedly reduced what Mondelez itself had to contribute, so the suit adds fiduciary breach and prohibited transaction counts over the company profiting from plan assets. The complaint argues that employees who complete the cessation program should get back surcharges already paid that year. That conflicts with the agencies’ August FAQs, which rejected that interpretation of the 2013 rules. These are allegations no court has weighed.

Judge Sarah F. Russell denied XPO’s motion to keep discovery, the exchange of documents and testimony, on hold in Hill v. XPO, a class action over the $100 monthly tobacco surcharge in the group health plans of XPO and GXO Logistics, its spun-off contract logistics business. A retired operations supervisor who paid the surcharge [alleges](https://digest.theinnerfirm.com/docs/hill-v-xpo-complaint-2024-10-23.pdf) that the companies cannot claim ERISA’s wellness program exception to the ban on charging tobacco users more, because employees who completed the free cessation program had the surcharge removed only going forward rather than refunded for the full plan year, and the plan materials didn’t explain an alternative way to avoid the surcharge. After most claims survived dismissal in March, XPO asked to keep discovery on hold while the judge considered another request to end the case. The judge refused, saying XPO was raising arguments it could have made earlier and the case was already two years old. The parties now head to a magistrate judge to set deadlines for the next stages of the case.

Two studies published October 6 map how the line between plan advice and wealth management keeps blurring. Cerulli and Morningstar’s Building the Bridge to Wealth finds 63 percent of surveyed advisers treat DC plans as at least a moderate priority for wealth prospecting, while 40 percent of participants already work with an adviser and, among those who do not, 20 percent want to hire one and 45 percent are undecided. The barriers are perception; 54 percent of unadvised participants believe they are not wealthy enough and 67 percent doubt advisory fees are worth the cost. A companion Crisil Coalition Greenwich study of hybrid investors adds a caution for the industry, clients who combine advised and self-directed accounts are 67 percent more likely to consider leaving their adviser and three times more open to automated advice. Sponsors should expect more financial wellness programs and one-on-ones that are also, candidly, prospecting.

Will Prest’s test for a financial wellness program is whether it helps an employee choose, not just learn. His composite employee juggles a 401(k), an HSA, credit card debt and a parent she helps support, and every tool she’s offered addresses one slice without ranking her priorities. EBRI’s 2025 employer survey found more than three quarters of firms ran cost-benefit analyses on their wellness offerings, and connecting standalone benefits remains one of the sticking points employers name. He’d ask any vendor three questions. Can employees compare options against the benefits they actually have? How do they reach a qualified human when they’re stuck? And what turns a decision into action? Measure follow-through, he argues, not logins.

In a 2023 IRS example, an employee pays $1,200 a month before taxes for a wellness policy and receives $1,000 a month for participating in wellness activities. Because the payment doesn't reimburse an actual, unreimbursed medical expense, the IRS says every dollar of it is taxable. In this podcast episode, Mercer's Wade Symons and Lori Fischler explain why calling a payment a wellness benefit doesn't make it tax free; there must be a basis in the tax code, meaning a substantiated, unreimbursed medical expense or indemnity coverage bought with after-tax dollars. The IRS has been playing, in their phrase, whack-a-mole with these designs since the early 2000s, and the agency's decision not to finalize related regulations in 2024 is no green light.

Judge David O. Carter certified three classes of Sodexo health plan participants who paid the plan's nicotine surcharge: two damages classes on whether the surcharge program violated ERISA's requirements and the plan's own terms, and a fiduciary-duty class certified because individual suits would risk inconsistent rulings. Certification follows a published Ninth Circuit decision last year holding that Platt never agreed to arbitrate his claims and that the arbitration agreement's class-action waiver couldn't block claims brought on the plan's behalf. Employers that charge tobacco users higher premiums now face the compliance questions at class scale: did the program offer a qualifying alternative way to avoid the surcharge, tell employees about it, and refund what shouldn't have been charged?

A retrospective on six July decisions: the Ninth Circuit's refusal to compel arbitration in the Capital Group 401(k) self-dealing suit, the largely denied dismissal motion in the O'Reilly Automotive tobacco-surcharge case, Elevance's forfeiture-suit dismissal with 40 days to amend, the standing-based dismissal of the ATI and State Street pension risk transfer suit, the Dish Network target-date-fund case ordered to trial, and the D.C. Circuit's partial reversal of a $13 million withdrawal-liability judgment won by the IAM National Pension Fund.

The International Foundation walks plan administrators through the tri-agency FAQs on tobacco surcharges that responded to the wave of wellness-program class actions, underscoring the two points sponsors most often get sued over: a plan that pays the wellness reward prospectively once an employee completes a reasonable alternative standard doesn't owe the reward retroactively to the start of the year unless the program promises it, and the required notice of alternatives need not appear in every document that merely mentions the program. The piece also reads the FAQs as a signal that further wellness guidance may come. With surcharge suits still being filed, the practical move is a document sweep to make sure notice language is consistent everywhere the program is actually described.

The IRS has moved from warning to auditing on fixed indemnity wellness arrangements marketed as payroll tax savers. The designs promise FICA savings and higher take-home pay, most commonly by paying employees back a portion of pre-tax premiums and claiming the payments are excluded from income, sometimes with benefits paid even when no medical expense was ever incurred. The agency has disagreed with that treatment in guidance since 2016 and said in 2024 that its concerns had escalated. Employers whose arrangements fail an audit could owe the taxes they should have withheld, plus penalties and interest. Any sponsor pitched one of these programs, or already in one, should have the promoter's tax opinion reviewed by counsel that does not profit from the sale.

Employers that charge tobacco users more for health coverage have received some enforcement relief from federal agencies. The [August FAQs](https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-74) from the Labor Department, HHS, and Treasury say the agencies will not enforce the requirement to pay the full wellness reward retroactively to workers who quit tobacco midyear, and they narrow which materials must explain the reasonable alternative, another way to earn the reward, such as completing a tobacco-cessation program. But the agencies' decision doesn't prevent employee lawsuits, as Marsh's alert explains. More than 75 lawsuits over tobacco surcharges are pending, appeals are before five federal appeals courts, and plaintiffs are also arguing that the underlying wellness rules are invalid. Programs should keep the reasonable alternative real: offer it, honor it, and disclose it. The FAQs changed the government's posture, not the law private plaintiffs sue under.

Fixed-indemnity insurance pays a set cash amount for a covered event, such as a hospital stay, and it has a legitimate place as an excepted benefit. Marsh's alert covers two developments. A federal court has invalidated the consumer-notice requirement the 2024 federal rule imposed on fixed-indemnity policies, so those notices are no longer required. And the tax warning stands: some vendors promise payroll-tax savings through wellness programs that pay supposedly tax-free cash benefits even when employees have no unreimbursed medical expenses, and the IRS says those arrangements don't deliver the promised tax treatment. Marsh's analysis walks through where the line sits.

CMS plans to add five programs for additional health conditions to its technology-enabled chronic-care payment model in spring 2027. The expansion, announced September 15, covers heart failure, COPD, substance use disorders, tobacco cessation, and longer-term care for muscle and joint conditions. The model already has 160 participating organizations. Foley Hoag reports that insurers covering 165 million people across Medicare Advantage, Medicaid, and private insurance have pledged to adopt similar payments tied to patient outcomes. If those commitments become contracts, the approach could extend to employer-sponsored coverage.

The tobacco-surcharge wave's first appellate argument, recorded Wednesday morning in Boston, is posted. It runs forty minutes before Judges Rikelman, Kayatta and Aframe on whether ERISA's wellness rules required Bally's to refund surcharges to smokers who completed the cessation program. We covered the district court's November opinion when the wave began, and however the panel comes out, it will be the first appellate word on the theory behind at least five pending appeals. A decision is still to come. The audio is worth a commute.

The litigation-side view of what the wellness FAQs do to the pending cases. The surcharge suits that began in 2024 lean on three theories, that the only reasonable alternative demanded quitting, that mid-year completers got no refund, and that alternatives went undisclosed. The guidance directly rebuts the refund theory, reasoning that the language plaintiffs cite came from the 2013 regulation's preamble, not its text. The prediction is measured. The FAQs could sway courts toward employers and thin out new filings where the alternative standard was actually disclosed, which leaves disclosure hygiene as the live battleground.

Mayer Brown's read of the wellness program FAQs is organized around the five conditions an outcome based program must satisfy, from the annual qualification opportunity to the 30 percent reward cap that rises to 50 for tobacco programs. Two clarifications do the practical work. Completing a reasonable alternative mid-year earns the reward only prospectively—a June cessation course does not refund the January through May surcharges. And materials that merely note costs vary with participation do not trigger the full disclosure package, while anything describing the actual standards must include the alternatives and the physician accommodation statement.

Aon's compliance and policy consulting team reads the FAQs against the tobacco surcharge litigation that produced them. The sharpest points come in the comments—that the 2013 preamble suggested retroactive rewards while the regulatory text never clearly imposed them, and that the enforcement position may reduce regulatory audit risk but does not eliminate litigation risk, since some courts have already agreed with retroactive full reward claims. A closing caution tells plans not to read the disclosure clarification as a reason to drop model reasonable alternative standard language from participant materials.

A walk through the late August FAQs confirming that a plan does not owe a tobacco surcharge refund back to the start of the plan year when a participant meets a reasonable alternative standard midyear. The Departments concede the 2013 regulatory text never clearly required retroactive application and promise no enforcement action against plans that pay the reward prospectively, while stopping short of amending the rule itself.

Bass Berry focuses on where the relief runs out. The FAQs bless prospective-only rewards and confirm that a passing reference to a wellness program in a benefits summary does not trigger the full disclosure obligation, but the forbearance binds only the agencies. Disclosure failures, fiduciary breaches, and plan design defects remain open theories for private plaintiffs.

The angle here is the notice mechanics. The reasonable alternative standard disclosure belongs in every plan material that describes a health contingent program's terms, and for outcome based programs it must also appear in the communication telling an individual they failed the initial standard. A summary of benefits that merely notes cost sharing can vary with wellness participation does not trigger the duty. The piece also stresses that the relief is temporary, pending future guidance.

The summary aims at HR execution. Beyond the headline relief on retroactive rewards, it restates the ground rules: outcome based programs need a reasonable alternative standard, rewards cap at 30 percent of employee only cost with 50 percent for tobacco programs, and materials describing the program must disclose the alternative and the physician accommodation. It closes with three action items—confirm the tax treatment of rewards, evaluate whether the program actually works, and train HR staff to handle alternative standard requests.

Chief Judge Jarbou dismissed every claim in the amended complaint. The headline holding voided the Labor Department's physician accommodation disclosure regulation as applied—because the rules themselves treat a tobacco cessation program as requiring no health related accommodation, requiring Meijer to notify participants of an accommodation it need not offer was an unreasonable reading of the statute after Loper Bright. The opinion also rejected the theory that using surcharge collections to offset employer contributions breaches fiduciary duties—the duty is to deliver promised benefits, not to maximize plan assets, and higher premiums may injure employees without injuring the plan. The prohibited transaction claim fell to the Sixth Circuit's Holliday rule that an employer may do by discretion what it could have done by plan amendment.

Mayer Brown reads the August 26 FAQs as a reversal of the Labor Department's own prior litigation positions on retroactive wellness rewards, with plans now required only to provide the reward for the period after a reasonable alternative standard is satisfied. The firm also explains the disclosure rules in plain terms. If plan materials only mention that a wellness program exists, nothing more is required, but once materials describe how the program works they must also explain the alternative standard and the option to follow a doctor's recommendations. Mayer Brown recommends auditing participant-facing materials against the new standard.

With employer health costs expected to jump 11.1% in 2027 by WTW's count, finance chiefs are moving into territory HR used to own. WTW's Tim Stawicki says employers are mostly avoiding drastic benefit cuts and instead scrutinizing vendors, hunting fraud and waste, steering employees to lower-cost providers, and looking at spousal surcharges and waiting periods. Big employers have largely locked their 2027 strategies; midmarket companies are deciding now.

Bradley's version adds a concrete example on the notice question. If your summary of benefits and coverage says cost sharing may vary based on a wellness program but does not describe how the program works, that alone does not trigger the obligation to disclose the reasonable alternative standard. A useful line to hand whoever drafts your enrollment materials.

Squire Patton Boggs adds two practical details to the FAQs Part 74 coverage. The enforcement relief means an employee who completes tobacco cessation counseling in June need not be refunded surcharges for January through May, and plan materials that merely mention a wellness program's existence, without describing its terms, do not trigger the obligation to disclose reasonable alternative standards.

Bricker tells the story of how we got here. A stray phrase in the 2013 regulations' preamble suggested employees who quit smoking mid-year had to get their surcharges refunded back to January, a reading plaintiffs' lawyers ran with. The new FAQs say prospective relief is enough, no refunds required. But the program still has to be reasonably designed with a properly disclosed alternative standard, so this is relief from one theory, not from the lawsuits.

Lockton reviews the tri-agency FAQs Part 74 non-enforcement position, under which the Departments will not act against health-contingent wellness programs that pay the full reward prospectively once a participant completes a reasonable alternative standard, rather than retroactively to the start of the plan year. The piece cautions that FAQ guidance does not bind courts and the surcharge class actions continue, so plans already paying retroactive rewards may want to stay the course.

Groom collects its August publications in one place, spanning DB plan funding rules, 45S credit and Saver's Match guidance, dependent care nondiscrimination, the wellness program enforcement relief, the e-delivery proposal, and the tobacco surcharge litigation.

The Departments of Labor, Treasury, and Health and Human Services have issued new joint guidance in the form of FAQs offering some enforcement relief for employer-sponsored wellness programs.

The agencies will not take enforcement action against plans that apply a tobacco surcharge reward prospectively once an employee satisfies a reasonable alternative standard, so employers need not refund amounts already collected. Bricker Graydon cautions that the relief is enforcement discretion, not a safe harbor. Programs must still be reasonably designed, properly documented, and disclosed, and the guidance does not resolve the private class actions already in the courts.

The quarterly survey tracks health plan design challenges after Barbich v. Northwestern, the forfeiture line following the Eighth Circuit's standing dismissal in Matula, actuarial-equivalence rulings in the Sixth and Eleventh Circuits, and the Supreme Court's withdrawal-liability decision in M&K Employee Solutions, with the Fifth Circuit's en banc surcharge case and Anderson v. Intel on the watch list.

Remote financial wellness programs can improve retirement saving behavior, but surveyed consumers still prefer personal or hybrid communication with advisers.

Groom situates the new tri-agency FAQ relief against the litigation wave that produced it: by the firm's count, the HIPAA wellness program rules have drawn more than 80 putative class actions claiming that premium surcharges for tobacco use violate ERISA. The relief addresses the midyear reward-timing and notice-disclosure questions; the broader surcharge fights, including the pending Sixth Circuit appeal in the Progressive case, remain in the courts.

New tri-agency FAQ guidance issued August 26 addresses elements of the 2013 wellness program regulations that have been the subject of dozens of class actions in recent years.

HR Dive rounds up practitioner reaction to the tri-agency wellness surcharge FAQs, with attorneys noting that aspects of ERISA once seen as settled continue to be challenged.

Thompson Hine warns employers about double dip health plan arrangements marketed as payroll-tax savings vehicles. Treasury and the IRS have said repeatedly that these arrangements do not work under the law, and employers who adopt them risk liability for back taxes, penalties, and costly W-2 corrections.

Federal regulators will not enforce a rule requiring wellness program rewards to be paid retroactively to the start of the plan year when a participant meets a reasonable alternative standard midyear, as long as the plan pays the reward for the rest of the year. The guidance also confirms that the reasonable alternative standard notice is required only in materials that actually describe the program's terms, not in materials that merely mention it.

The employer advocacy group warned that litigation challenging wellness program incentives could discourage employers from offering health-related premium discounts.

A federal court in Tennessee denied Cracker Barrel's motion to dismiss in its entirety in a putative class action challenging the tobacco-user premium surcharge in its self-insured health plan, on claims that the plan failed to offer a compliant reasonable alternative standard and failed to give adequate notice of it, both required under the wellness-program nondiscrimination rules. Three days earlier, a Maryland federal judge reached a similar result in a class action over Marriott's $15-per-week tobacco surcharge, letting through a claim that plan communications named a smoking-cessation program without explaining how to enroll or whether enrolling would avoid the fee. Two courts in three days is the pattern worth watching: sponsors running a tobacco surcharge should treat “we offered an alternative” as necessary but not sufficient: notice design, placement, and reimbursement mechanics are now live issues in both cases. (The broader split runs both ways: earlier dismissals went the other way in Williams v. Target and Spencer v. Campbell Soup, so treat this as an emerging, unsettled pattern, not a rule.)

Groom surveys the tobacco-surcharge docket after the trio of July decisions favoring employers, including the Target and Campbell Soup dismissals covered here this week, and asks whether the 75-case wave has crested or is merely regrouping.

Holland & Knight on a pair of same-day district court dismissals of tobacco-surcharge class actions, against Target in Minnesota and Campbell Soup in New Jersey. The Digest covered the Target ruling August 11; per H&K's account, the companion decisions share a notable post-Loper Bright thread, reasoning that DOL wellness-notice requirements beyond the statutory text are unenforceable.

Financial Finesse research suggests employees approaching retirement who engage with virtual financial wellness programs are significantly more likely to take key planning actions and improve retirement readiness.

On July 22, 2026, the District of Minnesota dismissed a putative class action challenging Target's tobacco surcharge under its employer-sponsored health plan. McGuireWoods reads the decision as a roadmap for the 75-plus pending surcharge suits, a docket readers met in yesterday's Boutwell Fay litigation update.

There are now more than 75 tobacco surcharge class actions pending in federal courts across the nation. Since our last article in January 2026, tobacco cessation litigation continues to heat up as cases have now spread to the First, Second, Sixth, Seventh, and Eight Circuit Courts of Appeal.

This column explores IRS guidance on these arrangements and potential risks to employers under federal law.

As discussed in a previous Holland & Knight alert, there has been an emerging wave of Employee Retirement Income Security Act of 1974 (ERISA) class actions challenging employers' tobacco-free wellness programs.

The article explores the recent increase in litigation involving tobacco cessation programs and the compliance issues employers should consider.

The ERISA Industry Committee filed an amicus brief asking the Second Circuit to affirm dismissal of a challenge to PepsiCo's tobacco-surcharge wellness program, arguing that the reasonable alternative standard applies to employees who use tobacco rather than guaranteeing every employee an annual chance to avoid the surcharge. The appeal is a key test in the wave of tobacco-surcharge class actions.