Can Small Businesses Charge Smokers More for Health Insurance?

Health insurance costs are a huge portion of many small business’s budgets. One way they might seek to recoup some of those costs is by charging smokers more for their insurance. But is that actually legal? Find out here.

Small business owners, feeling the financial strain of providing health insurance to employees, are looking for ways to cut costs. Some would like to pass some of the costs of an employee’s bad habits on to the employee but are you allowed? Take smoking, for example. Can you charge an employee that smokes more for their health insurance than one that doesn’t smoke?


The (Kind Of) Easy Answer

The answer to this question largely falls not under the Affordable Care Act but the older HIPAA laws. HIPPA doesn’t allow you to charge an employee a higher premium because of a health factor. Health factors are mostly what you would think—you can’t charge a disabled person a higher premium, for example. If you know that somebody was recently diagnosed with something, you can’t raise their premium, and you can’t raise rates because you know that they spend a lot of time at the doctor.

You also can’t charge your thrill-seeker employee more. Maybe somebody rides a motorcycle to work every day, or they’re in to horseback riding, skydiving, or skiing. If you charged these people higher premiums you would be in violation of the law. It would seem that smokers would fall into this.

But that’s not the whole story. HIPPA allows employers to “reward” non-smoking employees as long as the reward isn’t more than a 20% premium discount and the employer establishes a wellness program.

There are 4 other requirements the employer must meet.

1. The program is reasonably designed to promote health and prevent disease.

2. Employees must have the opportunity to qualify for the reward at least once per year.

3. Employees who can’t stop smoking must be given an alternative for qualifying—educational classes for example.

4. That alternative must be disclosed in the paperwork.

As long as you can satisfy those conditions, you can charge non-smokers less than smokers. You can read the Department of Labor’s guidelines here.

Not That Easy

It’s true that there is some leeway that allows it but small business owners have to ask themselves if it’s worth the possible legal challenges. For businesses with a lot of employees and an established legal team the savings might outweigh the potential costs of legal proceedings but if not, are you ready to deal with these problems?

First, the Americans with Disabilities Act prohibits discrimination against employees with disabilities. Smoking hasn’t been formally identified as a disability but there are numerous “disabilities” that strongly correlate—COPD, emphysema, and lung cancer, to name a few.

Attorneys could argue that once smoking becomes a decades-long lifestyle, quitting is no longer a matter of choice. Experts acknowledge that an argument like that might be a stretch but there’s a strong chance that it would go to trial—costing the company a lot of money.

There are also state law concerns. The District of Columbia prohibits any discrimination against smokers, for example. Other states and localities have similar laws. The small business owner has to carefully review laws in their area before implementing such a program.

Third, the cost of creating, running, and maintaining records related to a wellness program should be weighed against the potential savings the program would create. There’s strong evidence that wellness programs make for healthier employees but small business owners that also serve as all-things-HR might not have the resources for the program.

See: for additional information.

Social Concerns

There are also intangible concerns that relate to employee morale and management. Are other employees expected to report people who are smoking out of sight of management? What about if they go out after work? Do they report behaviors taking place outside of work hours?

Is the report of another employee grounds for rescinding the reward or is there a due-process that includes an investigation?

How will you verify that employees are or are not smoke free? Will you trust what they say? What happens if you later find out they lied on the paperwork? How about e-cigarettes—are people that use them considered smokers or not?

Do you risk turning your work environment into one that is hostile toward smokers if people know that they are indirectly paying for the smoker’s higher insurance premiums if left unreported?

These are just a few of the concerns that you will have to wade through if you decide to enact a tiered system. Is the time and effort worth the hassle? That will largely depend on how many employees you have, whether or not you have an HR department, and other factors specific to your business.

However, there’s no doubt that having an employee wellness program is beneficial even if it isn’t specifically to address smokers. Rewarding physical activity, healthy eating, and wellness exams will pay off over time not just for your employees, but also on your health insurance bill.

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