Employers setting up employee wellness programs need to know how federal law will affect the design of those programs, benefit experts say.

The key requirements for wellness plans are laid down by two federal laws — the 1996 Health Insurance Portability and Accountability Act and the Genetic Information Nondiscrimination Act of 2008.

For example, HIPPA imposes a limit on the rewards or financial incentives employers can offer employees through so-called results-based wellness programs. Examples of such programs would include employees pledging that they do not smoke or striving to attain certain cholesterol levels.

Typically, “these programs are outcomes oriented,” said Steve Wojcik, vice president-public policy with the National Business Group on Health in Washington.

Under the law, the reward — if a wellness program is offered only to employees — cannot exceed 20% of the total cost of employee-only coverage. If the program is open to employees' dependents, then the 20% differential is based on the cost of coverage in the plan in which employees and their dependents are enrolled.

However, that 20% limit, effective in 2014, will be raised to 30% under a provision in the Patient Protection and Affordable Care Act of 2010.

That increase in the maximum financial incentive will be welcomed by employers, experts say.

“Some employers already are bumping up against that 20% limit. It will be useful to have a 30% limit,” said Susan Nash, a partner with the McDermott Will & Emery L.L.P. law firm in Chicago.

“That's good news for employers,” said Alison Schaap, senior vice president-health and benefits consulting in Chicago for Aon Hewitt, referring to the higher permitted premium differential.

However, in wellness programs when the reward or incentive is conditioned on meeting the differential, the reward has to be available to all “similarly situated employees, with a reasonable alternative standard offered.

%%BREAK%%

For example, take the case of a wellness program in which there is a 20% premium differential between smokers and nonsmokers.

For that type of program, an employer would have to offer an alternative to employees who cannot pledge that they do not smoke.

“You must give them the ability to qualify for the lower premium,” said Ms. Nash, referring to the employees who cannot pledge that they are nonsmokers.

For example, an acceptable alternative, experts say, would be for the employer to provide the premium credit to employees who participate in smoking-cessation programs that the employer would offer.

“Employers have the flexibility to determine what is a reasonable alternative,” Ms. Schaap said.

Other HIPAA requirements laid down for wellness programs include:

• Employees have to be given the opportunity to qualify for the reward at least once a year.

• The employer must disclose the availability of a reasonable alternative standard.

• The program has to be reasonably designed to promote health or prevent disease.

Those nondiscrimination rules, though, do not apply, if a reward is not conditioned on meeting a standard related to a health factor. For example, an employer could simply give cash payments, say $100, to employees who complete health risk assessments or reimburse employees for the cost of smoking cessation classes, regardless of whether employees stop smoking after completion of the classes.

The tax status of such incentives depends on the way it is offered. For example, cash payments would be considered taxable income to employees. On the other hand, wellness programs that involve health care premium differentials have no effect on employees' taxable income, while employer contributions to employees' flexible spending accounts — for example, for completing a wellness program — would not be taxed.

As a wellness incentive, “cash has been popular because it is so easy to administer, but employers have come to recognize there can be more value through health care premium reductions,” said Alexander Domaszewicz, a principal and senior health and benefits consultant with Mercer L.L.C. in Newport Beach, Calif.

Aside from nondiscrimination and tax issues, employers offering wellness programs must abide by requirements laid down by the Genetic Information Nondiscrimination Act.

For example, under the act, Aon Hewitt's Ms. Schapp said employers can offer employees financial incentives for completing health risk assessments that ask questions about family medical or other genetic information, as long as employers clearly identify those questions that request genetic information and make clear the reward is available whether or not the employees answer the questions.