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Can Employers Legally Incentivize Employees to Take Better Care of Themselves?

The following article does NOT constitute legal advice and should not be used as such. It is for educational purposes only. Readers should retain legal counsel to obtain definitive answers.

It is in an employer’s best interest to have employees be healthy and happy, because such traits lead to more productivity and job satisfaction. But employees are not always healthy or happy. Life happens to employees, and sometimes those life changes are short-lived, and other times those changes can have long-lasting consequences. Enter the employee wellness program. Having worked with many workplace wellness professionals over the years, I can attest that the community sincerely wants all employees to lead better lives and thereby achieve greater wellbeing. But not every employee may be on board with the idea. Some are skeptical of the underlying motivation. Some feel like they don’t belong in a wellness community, perhaps because they don’t see themselves as fit or well (though they are the employees wellness program designers aim to help most). Finally, others are just too busy or focused on other challenges in work or life to get involved with workplace wellness programs.

Now enter incentives. If an employer could throw incentives at employees to engage in wellness programs, perhaps more employees would engage. According to a recent Rand Corporation study, of the 51 percent of employers who offer workplace wellness programs, 69 percent use financial incentives as a strategy to encourage employees to use wellness programs.1 Incentives are most common for health risk assessment completion and lifestyle management programs, with about 30 percent of employers with a wellness program offering such incentives.2 Financial incentives may include cash, cash equivalents (e.g., discounted gym memberships), and novelty items (e.g., t-shirts or gift cards).3 Employers also link incentives to the employees’ share of health plan premiums, health reimbursement account contributions and plan cost-sharing, with incentives impacting the employee share of health plan premiums being the most popular.4

Another Rand Corporation study found that employers who do not use incentives had a median employee participation rate of 20 percent, compared to a 40 percent median employee participation rate for employers who used monetary or nonmonetary incentives.5 Employers that used penalties or surcharges for not participating boosted their median employee participation rates to 73 percent.6 Other studies find that older men are most likely to respond to incentives, as are employees who were in generally poorer health, and that most employees want incentives to help motivate them to make lifestyle improvements.7

Workplace wellbeing incentives have come to the forefront in the wake of COVID19. Just last week, the federal government gave its implied “blessing” that incentivizing employees to receive the COVID19 vaccine would be permissible. For example, Health and Human Services (HHS) Secretary Andy Slavitt was quoted “We are asking businesses to amplify CDC messages about masking and vaccinations on their products, properties and web sites.”

The article noted that Uber, PayPal and Walgreens were teaming up to provide $10 million in free rides to vaccination sites, while Lyft had partnered with CVS and the YMCA to provide $60 million free or discounted rides to vaccination sites.

So what are the legal boundaries for incentivizing employees around health and wellbeing? The remainder of this blog post explores the most common legal considerations.

Federal Laws

Three key federal laws permit wellness programs to adopt financial incentives. Those laws are the Health Insurance Portability and Accountability Act (HIPAA), the Americans with Disabilities Act (ADA) and the Genetic Information Nondiscrimination Act (GINA). Two of those laws, the ADA and GINA, apply to incentives used for screening purposes only. Screening can include health risk assessments or biometric screens.


HIPAA nondiscrimination rules first created this carve out for wellness programs, and the Affordable Care Act (ACA) expanded upon it.8 The law divides wellness programs into two groups: 1) participatory; and 2) health contingent. Health contingent programs are further divided between activity-only and outcomes-based programs.

In a participatory program, a participant earns financial incentives by merely participating in the program. The participant is not expected to achieve a certain wellness goal, such as losing a certain amount of weight or having a certain blood pressure level. That is in contrast to participants in health-contingent programs. In those programs, financial incentives are tied to achieving a health status goal, such as a certain weight or blood pressure (outcomes-based), or completing an activity that some individuals may be unable to do or have difficulty doing because of a health factor (activity-only), such as severe asthma, pregnancy or a recent surgery. Some examples of activity-only programs may be walking, diet or exercise programs.9

The law limits financial incentives to no more than 30 percent of the cost of health coverage, but the incentive can climb as high as 50 percent of the total cost of coverage to the extent that the additional 20 percent is in connection with a program designed to prevent or reduce tobacco use.10 The law calls these financial incentives “rewards,” but the law’s definition of “reward” is a bit misleading. The law defines “reward” as including both obtaining a reward and imposing a penalty.11 So, the 30 percent (or 50 percent for tobacco cessation programs) limit can be applied to the amount of the reward or the amount of the penalty.

In addition to the maximum reward limit, the HIPAA/ACA rules require health contingent programs to meet four other tests for compliance. So, in total there are five tests for compliance. These five tests are:

  1. Frequency of Opportunity to Qualify. The program must give individuals eligible for the program the opportunity to qualify for the reward at least once per year.12
  2. Size of Reward. The total reward for all wellness activities and/or goals must not exceed thirty percent (or fifty percent for tobacco cessation programs) of the total cost of employee-only coverage under the plan (or, if an employee’s family can participate in the wellness program, the reward must not exceed thirty percent (or fifty percent if tobacco cessation programs are included) of the total cost of coverage in which an employee and any dependents are enrolled. The cost of coverage includes the total amount of employer and employee contributions towards the benefit package under which the employee is (or the employee and any dependents are) receiving coverage.13
  3. Reasonable Design. The wellness program must be reasonably designed to promote health or prevent disease. That is, it must have a reasonable chance of improving the health of, or preventing disease in, participating individuals, and it should not be overly burdensome or a subterfuge for discriminating based on a health factor.14 Unlike the final ADA rules, discussed below, the HIPAA/ACA rules did not provide examples on what would make a wellness program reasonably designed to promote health or prevent disease. The preamble to the HIPAA/ACA rules states that health-contingent wellness programs are not required to be accredited or based on particular evidence-based clinical standards, but if they are, such standards may increase the likelihood of wellness program success.15 In contrast, as discussed in the ADA section below, the EEOC was much more explicit in asserting that wellness programs that collect health information must use that information to design a program that addresses at least a subset of conditions identified. This might be through providing follow-up information or advice designed to improve the health of participating employees.16
  4. Uniform Availability and Reasonable Alternative Design. The full reward under the program must be available to all similarly situated individuals. To achieve this, health contingent wellness programs must allow a reasonable alternative standard (or waiver of the initial standard) for obtaining the reward for any individual for whom, for that period, it is unreasonably difficult due to a medical condition or medically inadvisable to satisfy the initial standard. For activity-only programs, plans may seek verification from an individual’s personal physician that a health factor makes it unreasonably difficult for him or her to satisfy, or medically inadvisable for him or her to attempt to satisfy, the initial standard. Plans may not seek physician verification for health-contingent programs. If an individual’s personal physician states that a plan standard (including, if applicable, the recommendations of the plan’s medical professional) is not medically appropriate for that individual, the plan must provide a reasonable alternative standard that accommodates the recommendations of the individual’s personal physician with regard to medical appropriateness. Plans may impose standard cost sharing under the plan for medical items and services furnished pursuant to the physician’s recommendations.

    The reasonable alternative standard cannot be a requirement to meet a different level of the same standard without additional time to comply that takes into account the individual’s circumstances. For example, if the initial standard is to achieve a BMI less than 30, the reasonable alternative standard cannot be to achieve a BMI less than 31 on that same date. However, if the initial standard is to achieve a BMI less than 30, a reasonable alternative standard for the individual could be to reduce the individual’s BMI by a small amount or percentage over a realistic period of time, such as within a year. Moreover, an individual must be given the opportunity to comply with the recommendations of the individual’s personal physician as a second reasonable alternative standard to meeting the reasonable alternative standard defined by the plan, but only if the physician joins in the request. The individual can make a request to involve a personal physician’s recommendation at any time and the personal physician can adjust the physician’s recommendations at any time, consistent with medical appropriateness.

    As for when the full reward to those who meet the reasonable alternative standard must be available, the plan must provide the full reward even for the months during which the individual did not meet the reasonable alternative standard. For example, if a calendar year plan offers a health-contingent wellness program with a premium discount and an individual who qualifies for a reasonable alternative on April 1, the plan must provide the premium discounts for January, February and March to that individual. Plans have flexibility to determine how to provide the portion of the reward corresponding to the period before an alternative was satisfied (e.g., payment for the retroactive period or pro rata over the remainder of the year) as long as the method is reasonable and the individual receives the full amount of the reward. In some circumstances, an individual may not satisfy the reasonable alternative standard until the end of the year. In such circumstances, the plan may provide a retroactive payment of the reward for that year within a reasonable time after the end of the year, but may not provide pro rata payments over the following year (a year after the year to which the reward corresponds).

    Individuals must request the reasonable alternative standard (and they must be notified of the opportunity to make such a request, as noted below). Plans are not required to determine a particular reasonable alternative standard in advance of an individual’s request, they merely must make available upon request. If the reasonable alternative standard is an educational program, the plan must make the educational program available or assist the employee in finding such a program and may not require the individual to pay for the cost of the program. If the reasonable alternative standard is a diet program, the plan may require the individual to pay for the cost of food, but not any membership or participation fee. Moreover, the time commitment required for the reasonable alternative standard must be reasonable. For example, requiring attendance nightly at a one-hour class would be unreasonable.17
  5. Notice of Other Means to Qualifying for the Reward. The plan must disclose in all plan materials describing the terms of a wellness program the availability of a reasonable alternative standard to qualify for the reward (and, if applicable, the possibility of waiver of the initial standard) including contact information for obtaining a reasonable alternative standard and a statement that recommendations of an individual’s personal physician will be accommodated. If plan materials merely mention that a wellness program is available, without describing its terms, this disclosure is not required.18

      The final regulations provide the following sample notice language:
      Your health plan is committed to helping you achieve your best health. Rewards for participating in a wellness program are available to all employees. If you think you might be unable to meet a standard for a reward under this wellness program, you might qualify for an opportunity to earn the same reward by different means. Contact us at [insert contact information] and we will work with you (and, if you wish, with your doctor) to find a wellness program with the same reward that is right for you in light of your health status.19

Two key points to remember about the HIPAA/ACA financial incentive law is first, that it applies to group health plans only. If a wellness program is not a group health plan program, this incentive law does not apply. Second, the HIPAA/ACA financial incentive limit applies to health contingent wellness programs only. It does not apply to participatory programs.

One other point to remember is that because HIPAA nondiscrimination rules apply to group health plans, those same plans are also subject to HIPAA privacy and security rules. Group health plans are “covered entities” subject to HIPAA privacy and security rules.20 The privacy rules include the requirement for employers who administer all or part of its health plan and who wish to receive from the plan individually-identifiable health information to certify to the group health plan, as provided by 45 CFR § 164.504(f)(2)(ii), that it will not use or disclose the information for purposes not permitted by its group health plan documents and the HIPAA privacy rule. Those employers that do not administer any part of the health plan should only receive from the group health plan summary health information for purposes of obtaining premium bids or modifying, amending or terminating the group health plan.21


The ADA requires employers with fifteen or more employees to provide reasonable accommodations to qualified individuals with a disability, unless the employer can demonstrate undue hardship.22 “Qualified individuals” are those individuals who can perform the essential functions of their jobs with or without reasonable accommodation.23 “Qualified” means that the individual satisfies the requisite skill, experience, education, and other job-related requirements of the position. Thus, unless an employer can show undue hardship, an employer must provide reasonable accommodations to those employees who can otherwise perform the fundamental job duties of the position.24 Reasonable accommodations include modifications or adjustments to the work environment.25 They also include modifications or adjustments that allow an employee with a disability to enjoy equal benefits and privileges of employment as are enjoyed by similarly situated employees without a disability.26

Title I of the ADA is enforced by the Equal Employment Opportunity Commission (EEOC) and prohibits discrimination by employers on the basis of disability in regard to terms, conditions and privileges of employment.27 Terms, conditions and privileges of employment can include participating in wellness programs. Thus, workplace wellness program designers must ensure that all employees, regardless of disability, have an equal opportunity to participate in the program and offer reasonable accommodations so they may participate and earn any financial incentives.

Discrimination under the ADA includes requiring medical examinations and making disability-related inquiries, including medical history inquiries, unless one of two exceptions applies: 1) such exam or inquiry is job-related and consistent with business necessity; or 2) the medical exam is voluntary and part of an employee health program available at the worksite.28 The restriction on asking questions about an employee’s medical status or conducting medical screenings applies regardless of whether the employee is disabled.29 The EEOC has defined a medical exam as “a procedure or test that seeks information about an individual’s physical or mental impairments or health.”30 These exams may include: 1) vision tests; 2) blood, urine and breath analyses to check for alcohol use or to detect disease or genetic markers; 3) blood pressure screening and cholesterol testing; 4) range of motion tests that measure muscle strength and motor function; 5) pulmonary function tests; and 6) psychological tests that are designed to identify a mental disorder or impairment.31 Medical exams do not include tests to determine the current illegal use of drugs; general well-being questions; physical agility tests or physical fitness tests to measure an employee’s ability to perform job tasks; or psychological tests that measure personality traits such as honesty, preferences and habits.32

For purposes of workplace wellness programs, a key term in the ADA prohibition against employee medical exams and medical history inquiries is the word “voluntary;” the ADA permits such exams and inquiries if they are part of a “voluntary” workplace wellness program. The only guidance the EEOC has provided with regard to the meaning of “voluntary” (that hasn’t yet been overruled or withdrawn) is that the employer can neither require participation nor penalize employees who do not participate.33 Thus, whether and how an employer can incentivize the collection of employee health information is a subjective inquiry. Before incentivizing the collection of COVID19 vaccine information, or any other health information as part of your workplace wellness program, employers should determine employee attitudes about such information collection to minimize the risk of complaints or worse, lawsuits.


Under the GINA regulations, an employer “may not offer a financial inducement (or incentive) for individuals to provide genetic information, but may offer financial inducements for completion of health risk assessments that include questions about family medical history or other genetic information, provided the [employer] makes clear, in language reasonably likely to be understood by those completing the health risk assessment, that the inducement will be made available whether or not the participant answers questions regarding genetic information.”34

Under this requirement, the regulations provide two examples, one that would violate GINA and one that would not. In the first example, an employer offers employees’ cash rewards to complete an HSA, even if they don’t answer the last 20 questions, which concern family medical history and genetic information.35 In the second example, which would violate GINA, the employer does not make clear which questions relate to genetic information and does not make clear which questions must be answered to obtain the cash reward.36

The regulations also determine that employers may offer financial inducements to employees who voluntarily provided genetic information “that indicates that they are at increased risk of acquiring a health condition in the future to participate in disease management programs or other programs that promote healthy lifestyles, and /or to meet particular health goals as part of a health or genetic service.”37 However, the employer must also offer these programs to “individuals with current health conditions and/or to individuals whose lifestyle choices put them at increased risk of developing a condition.”38 Again, the regulations provide examples.

For instance, employees who voluntarily disclose a family medical history of heart disease or diabetes on an HSA and those who currently have those conditions are offered money to participate in a wellness program. This financial inducement does not violate GINA.39 It also would not violate GINA to offer additional financial inducements for achieving certain health outcomes, such as losing weight or lowering blood pressure.40

Employers must also remember that when offering financial inducements to encourage participation in wellness programs, other federal laws may apply, including the ADA and HIPAA/ACA. For instance, as learned in the previous section, if offering financial inducements to participate in a wellness program that collects health information, employers may need to limit the amount of the incentive to comply with the ADA “voluntary” requirement.41

What About Incentivizing Against Employee Use of Lawful Products, Such as Tobacco and Alcohol?

For some products, such as tobacco and alcohol, it is generally known that both the federal and state governments permit use of those products within certain parameters, such as age and venue. For other products, such as marijuana and hemp-based products like CBD oil, the analysis is not as clear. Indeed, there is much confusion about whether marijuana or hemp-based product use is legal because federal and state law may differ. Sometimes when a federal law conflicts with a state law, the federal law wins because it “preempts” the conflicting state law. This is the case with employer health insurance (i.e., group health insurance). A federal Employee Retirement and Income Security Act of 1974 (ERISA) preempts state insurance regulation. This was because Congress wanted employers who operated across states to have to worry about only one law, and not multiple state laws.

Sometimes, however, Congress specifically says that a federal law will not preempt state laws. This was the case with the 2018 Farm Bill, which removed hemp-based products that contain less than 0.3% THC from the federal Controlled Substances Act and allowed the sale, transport or possession of hemp-derived products across state lines for commercial or other purposes. The 2018 Farm Bill did not, however, legalize marijuana. That substance is still illegal under federal law.

States vary widely on whether and how they allow consumption of hemp-based or marijuana products. For example, some states allow hemp-based products like CBD to be used in food or dietary supplements. Some states prohibit it. Other states still view CBD as a controlled substance. A number of states have legalized marijuana for medical and/or recreational use. Though it is beyond the scope of this blog post to detail each state’s current law on hemp-based products, the important point is to know that state laws differ and are constantly changing.

So, getting back to the initial question, can a workplace wellness program incentivize employees to not use otherwise lawful products that may not help that employee’s wellbeing? Assuming marijuana or hemp-based product use is not helpful for wellbeing (and there are many people and numerous studies that may place that assumption into question), workplace wellness professionals may want to discourage the use of such products as part of the program.

If the employer excludes employees from receiving certain benefits because the employee uses lawful products off premises and during nonworking hours, that could be considered discrimination under state law. For example, Wisconsin’s law under Wis. Stat. s. 111.31-35 prohibits employers from discriminating against employees for using lawful products off the employer’s premises and during nonworking hours. Discrimination includes denying the employee the same terms, conditions and privileges of employment. Wis. Stat. s. 111.322. Thus, if an employer denied an employee a benefit, such as paid time off, because he or she used tobacco, alcohol, or, if legal in the state, marijuana, when not at work, even if part of a wellness incentive program, the employer could face an allegation that the employer discriminated against the employee in violation of state law.

There are exceptions to discrimination based on the use of lawful products. In Wisconsin, as an example, employers do not violate the law if the use of lawful products does any of the following:

  • Impairs the ability to undertake adequately the job-related responsibilities
  • Creates a conflict of interest or an appearance of a conflict of interest with the job-related responsibilities
  • Conflicts with a bona fide occupational qualification that is reasonably related to the job-related responsibilities
  • Conflicts with any federal or state statute, rule, or regulation
  • Violates Wisconsin Statutes Section 254.92(2) that prohibits individuals under 18 years of age from purchasing, attempting to purchase, or possessing any cigarette, nicotine product, or tobacco product.

There is another important exception involving the lawful use of products. Group health plans are allowed to vary premiums based on tobacco use because such discrimination occurs within ERISA. As noted earlier, ERISA preempts state law that tries to regulate employer health coverage. So long as the health plan is deciding the premium differential for tobacco users and nonusers, state anti-discrimination laws such as the one discussed above would be preempted by the federal law. Hence, a workplace wellness program that imposed a higher premium on tobacco users as an incentive to stop smoking would not violate state laws regarding the lawful use of products. However, such a program would have to comply with the Affordable Care Act (ACA) wellness incentive rules, which include meeting five different requirements, such as offering a reasonable alternative standard. For more information about the five factor test under the ACA, click here.

As always, if you find yourself unsure about whether or how you can offer incentives for workplace wellness program, call the Center for Health and Wellness Law for help.

1 Soeren Mattke, et al., Workplace Wellness Programs Study: Final Report, Rand Health, at 69 (2013).
2 Id.
3 Id. at 71.
4 Id. (finding that 37 percent of employers that use incentives use them toward health plan premiums, 5 percent use them toward health reimbursement account contributions and 3 percent use them to adjust health plan cost-sharing).
5 Soeren Mattke, et al., Workplace Wellness Programs: Services Offered, Participation and Incentives, Rand Corporation, at xii-xiii (2014).
6 Id.
7 John Wilcox, Those who need wellness most respond to incentives, Business Management Daily (April 10, 2015), available at (last visited April 20, 2015); Andrea Davis, Employees want wellness incentives, despite regulatory uncertainty Employee Benefits News (January 30, 2015), available at (last visited April 20, 2015).
8 78 Fed. Reg. 33158. 33158-59 (June 3, 2013).
9 45 CFR § 146.121(f).
10 45 CFR § 146.121(f).
11 Id.
12 45 CFR ss. 146.121(f)(3)(i) and (4)(i).
13 45 CFR ss. 146.121(f)(3)(ii) and (4)(ii).
14 45 CFR ss. 146.121(f)(3)(iii) and (4)(iii).
15 78 Fed. Reg. 33158, 33162 (June 3, 2013).
16 81 Fed. Reg. 31126, 31133 (May 17, 2016).
17 45 CFR ss. 146.121(f)(3)(iv) and 4(iv).
18 45 CFR ss. 146.121(f)(3)(v) and (4)(v); see also 78 Fed. Reg. 33158, 33163 (June 3, 2013).
19 45 CFR § 146.121(f)(6).
20 45 CFR s. 160.103 (definitions of “covered entity,” “health plan” and “group health plan”).
21 45 CFR s. 164.504(f)(2)(ii).
22 42 USC § 12112(b)(5)(A 42 USC § 12111(5)(A) (defining “employer” as “a person engaged in an industry affecting commerce who has fifteen or more employees for each working day in each of 20 or more calendar weeks in the current or preceding calendar year.”).
23 42 USC §§ 12111(8), 12112(a).
24 29 CFR § 1630.2(m).
25 EEOC Enforcement Guidance: Reasonable Accommodation and Undue Hardship under the Americans with Disabilities Act, available at (last visited January 13, 2016); see also 29 CFR § 1630.2(o)(1)(i-iii).
26 Id.
27 29 USC § 12112(a).
28 42 USC § 12112(d)(4) (emphasis added).
29 42 USC § 12112(d)(1).
30 EEOC Enforcement Guidance, No. 915-002 (July 27, 2000).
31 Id.
32 Id.
33 Id.
34 Id. at § 1635.8(b)(2)(ii).
35 Id. at § 1635.8(b)(2)(ii)(A).
36 Id. at § 1635.8(b)(2)(ii)(B).
37 Id. at § 1635.8(b)(2)(iii).
38 Id.
39 Id. at § 1635.8(b)(2)(iii)(A).
40 Id. at § 1635.8(b)(2)(iii)(B).
41 Id. at § 1635.8(b)(2)(iv).

Barbara Zabawa

Barbara J. Zabawa

President of the Center for Health and Wellness Law, LLC

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