With skyrocketing healthcare costs many employers are developing wellness programs to improve the health of their employees.

Programs often reward employees for good behaviors and penalize employees with unhealthy habits like smoking. What many people don’t realize is that most of these programs violate the nondiscrimination provisions of the Health Insurance Portability and Accountability Act of 1996 by treating employees differently based on factors related to their health status.

If a program treats all employees alike regardless of health status is permissible and not discriminatory. For example, reimbursing an employee for completing a smoking cessation program is permissible if reimbursement is based on participation in the program and is not contingent upon the employee’s success at quitting smoking. Likewise, a wellness program that reimburses employees for health club memberships or which rewards employees for participation in a wellness event regardless of the outcome are also permissible.

To bring wellness programs into compliance with HIPAA, the U.S. Department of Labor has issued regulations which go into effect with plan years beginning July 1, 2007 or later. Employers with calendar year plans need to ensure that their wellness programs comply with the nondiscrimination regulations on or before Jan. 1, 2008.

The Department of Labor has provided a limited authorization for employers to reward employees who engage in healthy behaviors. In order to qualify for this authorization, a wellness program that provides a reward to an employee for satisfying a standard related to a health factor must meet the following five requirements:

1. The total reward for all the plan’s wellness programs that require satisfaction of a standard related to a health factor is limited, generally, to no more than 20 percent of the cost of the employee-only coverage under the health plan. If dependents are included, then the program must not exceed 20 percent of the cost of coverage for the employee and dependents.

2. The program must be reasonably designed to promote health and prevent disease.

3. The program must give individuals eligible to participate the opportunity to qualify for the reward at least once per year.

4. The reward must be available to all similarly situated individuals. The program must allow a reasonable alternative standard (or waiver of initial standard) for obtaining the reward to any individual for whom it is reasonably difficult, due to a medical condition, to satisfy the initial standard.

5. The plan must disclose in all materials describing the terms of the program the availability of a reasonable alternative standard (or waiver of the standard).

If the plan meets the foregoing criteria, the plan may not only offer rewards based on healthy behaviors, but can also impose a premium differential between smokers and nonsmokers.

As noted above, most employers will need to ensure that their wellness plans comply with the foregoing criteria on or before Jan. 1, 2008. Additional information is available on the Department of Labor’s Frequently Asked Questions page at http://www.dol.gov/