Key Takeaways
- • Dozens of ERISA lawsuits, mostly filed since 2024 and roughly 90 smoking cessation suits according to Groom Law Group principal Kara Petteway Wheatley, challenge employer tobacco surcharges that are not rebated when employees complete cessation programs.
- • The August 2026 guidance from the Departments of Labor, Treasury, and Health and Human Services states that the departments will not enforce the retroactivity statement in the 2013 preamble until further guidance or regulations are issued, but the guidance is non-binding and does not eliminate litigation risk.
- • Williams v. Bally's Management Corp. before the 1st U.S. Circuit Court of Appeals, argued in September 2026 after a November 2025 district court dismissal, is seen as the likely first appellate ruling; Bally's surcharge is $65 per month, or about $780 per year.
- • Noel v. PepsiCo Inc. is scheduled for oral argument before the 2nd Circuit on Dec. 2, following a February 2026 district court dismissal.
- • Employer counsel at Baker Botts and Mayer Brown advise reviewing wellness program plan materials and disclosures, with Mayer Brown noting that good-faith program changes are protected under the Federal Rules of Evidence on subsequent remedial measures.
Summary
Employers offering wellness programs with tobacco surcharges, which are extra fees assessed on the health insurance of smokers and other tobacco users, have faced a growing wave of ERISA litigation. Employees argue that surcharges should be refunded retroactively once they complete a smoking cessation program or another approved action such as health coaching or nicotine-replacement therapy. Plaintiffs also contend that programs lacking a retroactive payment provision violate HIPAA's health discrimination provisions. According to Pensions & Investments, the cases have produced a mix of federal court rulings, dismissals and several settlements with no clear legal theme.
Plaintiffs' counsel at Siri & Glimstad argue that federal regulations require the "full reward," meaning a surcharge taken before program completion must be refunded or credited. Employers and their lawyers counter that this reasoning rests on a 2013 Department of Labor preamble containing examples rather than binding regulation, and federal judges dismissing such suits have largely agreed. Douglas Hinson, executive director of the ERIC Legal Center, said "the dollars in these cases can be large" and warned that defending suits diverts money from benefits.
The August 2026 guidance from the Departments of Labor, Treasury, and Health and Human Services states that "the regulatory text of the 2013 final rules does not clearly require retroactive application of the reward," and that the departments are exercising enforcement discretion accordingly. Attorneys described the guidance as helpful but limited. Tina Q. Nguyen of Baker Botts said "you need legislation due to the uncertainty," and Richard Nowak of Mayer Brown noted that the guidance "doesn't have the force of law. It's non-binding." Wheatley said it "may not mitigate litigation risk."
The first appellate test is expected from the 1st Circuit in Williams v. Bally's Management Corp., argued in September. Tracy Williams sued in April 2025 and a Rhode Island district court dismissed the complaint in November 2025, finding that ERISA does not require retroactive reimbursement. Bally's employees who use tobacco pay $65 monthly, and the surcharge is removed going forward once they complete a cessation program. The next key case is Noel v. PepsiCo Inc., set for a Dec. 2 oral argument before the 2nd Circuit after a February 2026 dismissal in White Plains, N.Y.; the district court found PepsiCo followed appropriate guidelines and gave adequate notice.
ERISA counsel advise employers to review plan terms, participant communications and disclosures, and to weigh litigation exposure based on the courts governing their headquarters locations. Nowak noted that changes made in good faith are protected under the subsequent remedial measures rule, adding that "if you believe you should make a change, you have a duty as a fiduciary to make the changes as long as they are justified."
Plaintiffs' counsel at Siri & Glimstad argue that federal regulations require the "full reward," meaning a surcharge taken before program completion must be refunded or credited. Employers and their lawyers counter that this reasoning rests on a 2013 Department of Labor preamble containing examples rather than binding regulation, and federal judges dismissing such suits have largely agreed. Douglas Hinson, executive director of the ERIC Legal Center, said "the dollars in these cases can be large" and warned that defending suits diverts money from benefits.
The August 2026 guidance from the Departments of Labor, Treasury, and Health and Human Services states that "the regulatory text of the 2013 final rules does not clearly require retroactive application of the reward," and that the departments are exercising enforcement discretion accordingly. Attorneys described the guidance as helpful but limited. Tina Q. Nguyen of Baker Botts said "you need legislation due to the uncertainty," and Richard Nowak of Mayer Brown noted that the guidance "doesn't have the force of law. It's non-binding." Wheatley said it "may not mitigate litigation risk."
The first appellate test is expected from the 1st Circuit in Williams v. Bally's Management Corp., argued in September. Tracy Williams sued in April 2025 and a Rhode Island district court dismissed the complaint in November 2025, finding that ERISA does not require retroactive reimbursement. Bally's employees who use tobacco pay $65 monthly, and the surcharge is removed going forward once they complete a cessation program. The next key case is Noel v. PepsiCo Inc., set for a Dec. 2 oral argument before the 2nd Circuit after a February 2026 dismissal in White Plains, N.Y.; the district court found PepsiCo followed appropriate guidelines and gave adequate notice.
ERISA counsel advise employers to review plan terms, participant communications and disclosures, and to weigh litigation exposure based on the courts governing their headquarters locations. Nowak noted that changes made in good faith are protected under the subsequent remedial measures rule, adding that "if you believe you should make a change, you have a duty as a fiduciary to make the changes as long as they are justified."
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