Regulatory changes continue to shape the employee benefits landscape, making it increasingly important for employers and HR leaders to stay informed about emerging compliance requirements. While many of these developments are still evolving through proposed rules or ongoing litigation, they have the potential to influence future plan design, administrative processes, and compliance responsibilities.

This year's mid-year regulatory update highlights several topics that are generating increased attention across the benefits industry. From proposed changes that could expand access to fertility benefits, to increased litigation surrounding tobacco surcharge wellness programs, employers are facing a growing number of issues that warrant careful review. State governments are also exploring new ways to address Medicaid funding, while courts continue to evaluate the balance between state regulation and federal ERISA protections for employer-sponsored health plans.

Although not every update requires immediate action, understanding the direction these developments are taking can help employers prepare for future changes, identify potential compliance risks, and make more informed decisions about their benefit programs.

Key Takeaways

• Federal agencies have proposed new rules that could allow certain fertility benefits to be offered as standalone "excepted benefits," potentially reducing some Affordable Care Act (ACA) and HIPAA compliance requirements.
• Tobacco surcharge wellness programs continue to face increased legal scrutiny, particularly when employers fail to properly administer required reasonable alternative standards.
• New Jersey has enacted an annual employer fee tied to employees enrolled in the state's Medicaid program, and similar proposals may emerge in other states.
• Courts continue to evaluate the extent of ERISA preemption over state pharmacy benefit manager (PBM) regulations, creating an evolving compliance landscape for employer-sponsored health plans.
• Employers should continue monitoring regulatory developments while reviewing plan documents, administrative procedures, and compliance practices to ensure they remain aligned with current requirements.

Proposed Fertility Benefit Rules Could Create New Opportunities for Employers

One of the most significant developments discussed during the webinar is a proposed federal rule that would change how certain fertility benefits are classified under employer-sponsored health plans.

If finalized, eligible fertility services could be treated as excepted benefits rather than being fully integrated into a major medical plan. While the proposal is still under review, the change could provide employers with additional flexibility when offering fertility-related benefits.

The public comment period for the proposal recently concluded, and any final rule would generally apply to plan years beginning on or after January 1, 2027.

What Are Excepted Benefits?

Excepted benefits are certain types of health-related coverage that are exempt from portions of the ACA and HIPAA requirements that apply to traditional group health plans.

Examples of existing excepted benefits include:

• Standalone dental coverage
• Standalone vision plans
• Certain accident or disability coverage

Under the proposed rule, qualifying fertility benefits could potentially join this category if they meet specific requirements.

This distinction matters because excepted benefits generally carry fewer compliance obligations than major medical plans, allowing employers greater flexibility in how those benefits are designed and administered.

Why Is This Change Being Considered?

The proposal follows broader federal efforts aimed at expanding access to fertility treatment and family planning services.

Rather than requiring employers to incorporate fertility coverage directly into their primary medical plans, regulators are exploring whether these benefits can be offered separately while still providing meaningful access to employees.

From a compliance perspective, this also helps address an area that has historically lacked clear regulatory guidance. Fertility benefits have often existed in a gray area, making plan design decisions more complicated for employers.

What Would Employers Need to Do?

To qualify as an excepted benefit under the proposed rule, fertility coverage would need to satisfy several conditions.

Coverage Must Be Limited to Fertility Services

Eligible benefits would need to focus specifically on services related to:

• Diagnosing infertility
• Treating infertility
• Managing infertility-related reproductive health conditions

The proposal is intended to address infertility treatment rather than broader medical services.

Lifetime Benefits Would Be Capped

The proposal includes a maximum lifetime benefit of $120,000 per participant.

While this may initially appear to be a high threshold, fertility treatments—including in vitro fertilization (IVF) and related procedures—can cost tens of thousands of dollars over the course of treatment. The proposed cap reflects the significant cost often associated with these services rather than encouraging unusually generous benefit designs.

Benefits Must Be Offered Separately

Perhaps the most significant structural requirement is that fertility benefits would need to exist separately from the employer's major medical plan.

Rather than simply adding fertility coverage to an existing health plan, employers would generally need to provide it through:

• A separate insurance policy,
• A separate contract or certificate, or
• A benefit that is otherwise not integrated into the primary medical plan.

This separation is one of the key factors allowing the coverage to qualify for excepted benefit status.

Employees Must Receive Clear Notices

Like many employer-sponsored benefits, participants would also need to receive appropriate plan communications describing:

• Available benefits
• Coverage limitations
• Provider networks
• Claims procedures
• Other standard participant information

While these notice requirements are familiar to most employers, they remain an important component of compliance under the proposed framework.

What Compliance Requirements Could Be Reduced?

One of the primary reasons this proposal has attracted attention is the compliance relief associated with excepted benefits.

If fertility benefits qualify under the new rules, they could become exempt from certain ACA market reforms and portions of HIPAA portability requirements that normally apply to major medical plans.

Examples include:

• Certain special enrollment requirements
• Restrictions involving pre-existing condition rules
• Some ACA preventive service requirements
• Annual out-of-pocket maximum requirements
• Certain dependent coverage provisions

However, employers should recognize that these benefits would not become exempt from every federal requirement. ERISA would still apply, and in many situations COBRA obligations could continue as well.

Looking Beyond Fertility Benefits

Although the proposal focuses specifically on fertility coverage, webinar presenters also noted that it could establish a broader regulatory framework for other emerging benefit offerings.

As employers continue exploring coverage for services such as weight management programs and GLP-1 medications, regulators could potentially apply similar "excepted benefit" concepts in future rulemaking.

While there is no indication that similar rules are imminent for other benefit categories, employers should watch this proposal closely as it may signal how regulators approach specialized health benefits going forward.

Why Tobacco Surcharge Wellness Programs Are Facing Increased Legal Scrutiny

For many employers, tobacco surcharge programs have long been viewed as a practical way to encourage healthier behaviors while helping manage healthcare costs. These programs typically require employees who use tobacco products to pay higher health plan premiums unless they meet certain wellness program requirements.

Although these arrangements remain permissible under federal law, they have become the focus of increasing litigation. Over the past two years, class action lawsuits have challenged whether employers are properly administering these wellness programs and meeting HIPAA's nondiscrimination requirements.

When Does a Tobacco Surcharge Become a Wellness Program?

An important distinction highlighted during the webinar is that not every wellness incentive falls under HIPAA's wellness program regulations.

The determining factor is whether the incentive is tied to the employer's group health plan.

For example:

Typically subject to HIPAA wellness rules:

• Higher health insurance premiums for tobacco users
• Reduced employee medical contributions
• HSA, HRA, or FSA contributions tied to wellness participation

Typically not subject to HIPAA wellness rules:

• Cash awards
• Gift cards
• General wellness incentives that are unrelated to the health plan

This distinction is important because once an incentive affects an employee's group health plan costs or benefits, additional compliance requirements generally apply.

Key Compliance Requirements Employers Should Review

When a tobacco surcharge is tied to a group health plan, HIPAA's wellness program rules establish several important requirements.

Incentive Limits

Employers may offer incentives or impose surcharges related to tobacco use, but those incentives are generally limited to 50% of the total cost of coverage, including both employer and employee contributions.

The calculation depends on who is eligible for the incentive. If only the employee participates, the limit is based on the cost of single coverage. If both the employee and spouse are eligible, the calculation is based on the tier of coverage in which they are enrolled.

Reasonable Alternative Standards

Perhaps the most important compliance requirement involves providing employees with a reasonable alternative standard.

Rather than simply charging higher premiums to tobacco users, employers must provide a realistic opportunity for employees to earn the incentive by participating in an alternative program if they cannot meet the original wellness goal.

Common examples include:

• Tobacco cessation classes
• Smoking cessation counseling
• Approved tobacco cessation products
• Other employer-approved quit-smoking programs

If a tobacco cessation course is offered as the alternative, it generally must be provided at no cost to the employee and within a reasonable timeframe for completion. Once the employee satisfies the alternative standard, they must be able to receive the full financial incentive available under the program.

Why Are Employers Being Sued?

The presenters noted a sharp increase in class action lawsuits challenging tobacco surcharge programs.

Many of these cases do not argue that tobacco surcharges themselves are unlawful. Instead, plaintiffs often allege that employers failed to properly administer the wellness program requirements required under HIPAA.

Common allegations include:

• Failing to adequately notify employees that an alternative program exists
• Providing insufficient information about how employees can qualify
• Establishing unreasonable deadlines that prevent employees from earning back the surcharge
• Improperly administering refunds after program completion

According to the webinar, approximately 50 class action lawsuits were filed in 2025 challenging employer tobacco surcharge programs, and 2026 is on pace to meet or exceed that number.

Recent Lawsuits Highlight Common Issues

Two recent lawsuits involving Waffle House and Whataburger illustrate the types of claims employers are facing.

In both cases, employees alleged they completed the employers' tobacco cessation programs but were unable to recover the surcharge they had already paid because the programs required completion before a September 30 deadline. Employees who finished later could avoid future surcharges but could not recover charges already paid during the current plan year.

The lawsuits also alleged that employees were not adequately informed about the availability or requirements of the alternative program. While the courts will ultimately determine whether these claims have merit, the cases serve as a reminder that careful administration and clear communication are just as important as plan design.

What Should Employers Consider?

Organizations that currently use tobacco surcharges may benefit from reviewing their wellness programs to ensure they:

• Clearly communicate available alternatives.
• Provide reasonable opportunities for employees to earn incentives.
• Follow documented administrative procedures consistently.
• Maintain plan documents and employee notices that accurately describe how the program operates.

With litigation continuing to increase, employers should confirm that both the design and administration of their wellness programs align with applicable HIPAA requirements.

New Jersey's Medicaid Employer Fee Introduces a New Compliance Consideration

While much of employee benefits regulation occurs at the federal level, states continue exploring new approaches to managing healthcare costs.

One of the newest examples comes from New Jersey, which recently enacted legislation creating an annual employer fee for certain organizations with employees enrolled in the state's Medicaid program. The law became effective July 1, 2026, although the first assessments are expected in 2027.

How Does the New Fee Work?

The fee applies to employers that have 50 or more employees enrolled in New Jersey Medicaid.

Importantly, this threshold is not based on the employer's total workforce. Instead, it counts only employees enrolled in the state's Medicaid program.

Annual fees increase based on the number of Medicaid-enrolled employees:

• 50–249 employees: $325 per enrollee
• 250–499 employees: $525 per enrollee
• 500 or more employees: $725 per enrollee

Each year, the state will notify affected employers of the number of qualifying employees and calculate the applicable fee.

Why Was This Law Enacted?

New Jersey officials have stated that the legislation is intended to help offset the growing cost of the state's Medicaid program.

According to data discussed during the webinar, hundreds of employers had significant numbers of employees participating in Medicaid, creating substantial costs for the state. The new fee shifts a portion of that financial responsibility to larger employers with high Medicaid enrollment.

Important Exceptions

The law also includes several exceptions.

Certain individuals are excluded from the fee calculation, including:

• Individuals who qualify for Medicaid because of certain disabilities.
• Employees who have worked fewer than 90 days.
• Part-time employees.
• Seasonal employees.

The legislation also prohibits employers from making employment decisions solely to avoid the fee, such as reducing employee hours or changing classifications.

Could Other States Follow?

Although New Jersey is among the first states to implement this type of employer fee, similar proposals have been discussed elsewhere.

The presenters noted that Connecticut and California have explored comparable approaches, and similar concepts have appeared historically in states such as Massachusetts and Maryland.

For employers operating in multiple states, this serves as another reminder that state-level benefits regulation continues to evolve alongside federal requirements.

Courts Continue to Shape ERISA's Relationship with State PBM Laws

Another area receiving significant attention involves Pharmacy Benefit Managers (PBMs) and the extent to which states can regulate employer-sponsored health plans governed by ERISA.

Recent court decisions continue to reinforce that this remains one of the fastest-changing areas of employee benefits law.

Arkansas Case Reinforces ERISA Preemption

The webinar highlighted a recent appellate decision involving CVS Caremark and an Arkansas law regulating pharmacy benefit managers.

The court concluded that certain portions of the state's law were preempted by ERISA because they interfered with how employer-sponsored health plans administer their pharmacy networks.

While the decision applies directly within the Eighth Circuit, it may influence how similar challenges are evaluated elsewhere.

Additional Litigation Is Already Underway

At the same time, other states continue pursuing their own PBM regulations.

For example, litigation in Tennessee challenges state restrictions involving relationships between pharmacy benefit managers and affiliated pharmacies. Similar legal questions continue to emerge across the country as states attempt to increase oversight while employers and PBMs argue that ERISA limits state authority.

What Does This Mean for Employers?

Most employers do not need to take immediate action as a result of these cases. However, organizations should recognize that pharmacy benefit regulation continues to evolve at both the federal and state levels.

For employers sponsoring self-funded health plans, these developments reinforce the importance of working closely with benefits advisors, third-party administrators, legal counsel, and other plan partners to understand how future regulatory changes could affect plan administration and fiduciary responsibilities.

Looking Ahead

While each of these regulatory developments addresses a different aspect of employee benefits, they share a common theme: the compliance landscape continues to evolve.

Some of these changes, such as the proposed fertility benefit rule, remain under consideration and may not take effect for several years. Others, including tobacco surcharge litigation and ongoing PBM court cases, are already influencing how employers administer their health plans. Meanwhile, new state initiatives like New Jersey's Medicaid employer fee demonstrate that employers must continue monitoring both federal and state developments.

Staying informed does not necessarily mean making immediate changes. However, regularly reviewing benefit plans, administrative procedures, employee communications, and compliance practices can help organizations prepare for future requirements while reducing the likelihood of avoidable compliance issues.

This content is provided for general informational purposes only and is not intended as insurance advice. Coverage, terms, and availability can vary by carrier and state. For guidance specific to your situation, we recommend speaking with a licensed insurance professional.

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