The U.S. Departments of Labor, Health and Human Services, and the Treasury have announced a significant shift in how wellness incentive compliance will be enforced for employers.
The announcement, made on August 26, 2026, confirmed that federal agencies will not pursue enforcement action against employers who withhold retroactive wellness reward payments to employees.
Health-contingent wellness programs allow employers to offer employees financial rewards or reduced health insurance costs in exchange for meeting specified health-related goals.
These programs can cover a broad range of areas, including nutrition, weight loss, tobacco cessation, fitness, substance abuse assistance, stress management, and general health education.
Determining when earned wellness incentives must be paid to employees has been a long-standing compliance challenge for employers operating under HIPAA and the Affordable Care Act.
Under existing law, employees who cannot meet the primary targets of a health-contingent wellness program must be offered a “reasonable alternative standard” or a waiver of the applicable health standard.
One widely used example of such a program is a tobacco surcharge, where employees who use tobacco pay a higher health insurance premium, such as an additional $50 per month.
An employee subject to a tobacco surcharge can satisfy a “reasonable alternative standard” by participating in cessation counseling, even without having successfully quit using tobacco.
Under the new guidance, employers would not be required to refund tobacco surcharges paid earlier in the plan year if an employee completes a cessation programme mid-year.
The announcement resolves years of uncertainty for employers, clarifying that wellness rewards earned mid-year need only be applied prospectively rather than retroactively.
Michael Fussell of Squire Patton Boggs, who authored analysis of the guidance, highlighted that the update delivers long-awaited clarity for employers sponsoring these programmes under federal law.
Employers who have been cautious about structuring wellness programmes due to back-pay liability concerns are likely to view the regulatory shift as a meaningful reduction in compliance risk.