Seeing Through the Smoke: 2 Courts Find ERISA Tobacco Surcharge Challenges Fail as Matter of Law

As discussed in a previous Holland & Knight alert, there has been an emerging wave of Employee Retirement Income Security Act of 1974 (ERISA) class actions challenging employers' tobacco-free wellness programs. Plaintiffs in these cases generally allege that the tobacco-free wellness programs are noncompliant with ERISA and that plan fiduciaries are violating their fiduciary duties when they impose and collect a surcharge for participants who use tobacco products.

In two decisions issued on July 22, 2026, courts dismissed plaintiffs' claims challenging employers' tobacco surcharges under ERISA. In Williams v. Target Corporation,¹ the U.S. District Court for the District of Minnesota dismissed claims that Target violated ERISA's nondiscrimination provisions by imposing an unlawful tobacco surcharge and breached its fiduciary duties by mismanaging surcharge proceeds. The court held that the plaintiffs lacked Article III standing on the self-dealing claim and determined that ERISA does not impose a physician accommodation notice requirement on wellness programs.

In Spencer v. Campbell Soup Company,² the U.S. District Court for the District of New Jersey dismissed a similar class action on both jurisdictional and merits grounds. The court held that the plaintiff lacked Article III standing because he never enrolled in or attempted to enroll in the employer's tobacco cessation program and that ERISA's "full reward" requirement does not mandate retroactive reimbursement of previously paid tobacco surcharges.

Both courts declined to defer to the U.S. Department of Labor's (DOL) 2013 regulations, which imposed notice requirements on employers beyond those enumerated in the statute.

The Parties' Arguments

Williams v. Target Corporation

In Williams, the plaintiffs alleged that Target's (the Company) wellness program violated ERISA in two ways. First, they claimed that the program failed to provide the "full reward" to participants who completed the alternative standard by failing to retroactively reimburse participants who completed the tobacco cessation program.³ Second, the plaintiffs claimed that the Company failed to provide notice that a plan participant's physician's recommendations would be accommodated when determining whether the participant met the reasonable alternative standard as required by DOL regulations.⁴ Additionally, the plaintiffs alleged that the Company breached its ERISA fiduciary duties by misusing proceeds from the tobacco surcharge for its own benefit.⁵

In its motion to dismiss the amended complaint, Target argued that the plaintiffs lacked Article III standing to assert their claims because the plaintiffs' alleged monetary injury (i.e., biweekly paycheck deductions) did not stem from the alleged ERISA violations identified in the complaint.⁶ Specifically, Target argued that the plaintiffs did not claim they completed the tobacco cessation program and were eligible to receive a reimbursement that the Company denied, nor did they allege that had they received notice that their physicians' recommendations would be accommodated, they would have procured a doctor's note exempting them from the surcharge.⁷ Target further argued that even if it were to cure the alleged deficiencies in its wellness program disclosures, the plaintiffs would still be subject to the tobacco surcharge because they remain tobacco users.⁸ In addition, Target argued that the plan materials regarding the tobacco cessation program were sufficient as a matter of law and that the DOL's physician-accommodation notice regulation was unenforceable because it sought to impose requirements on employers not found in the statute.⁹

In opposition, the plaintiffs argued that their injury was best understood as paying a fee they should not have been charged in the first place because ERISA prohibits Target from imposing the surcharge if its wellness program does not comply with the statutory requirements.¹⁰ On the notice question, the plaintiffs implicitly conceded that the statute itself does not require the physician-accommodation notice outlined in the regulation but argued that the DOL regulation "fill[ed] up the details" of the statutory notice requirement as authorized by the U.S. Congress.¹¹ Finally, on the fiduciary duty self-dealing claim, the plaintiffs argued that Target had a duty to use the surcharge proceeds to support coverage for plan participants' health insurance – specifically, to reduce premiums paid by non-tobacco users – and that Target's failure to do so injured the plan and its participants collectively.<¹²

Spencer v. Campbell Soup Company

In Spencer, the plaintiff alleged three counts: 1) The tobacco surcharge was unlawful because ERISA mandated retroactive reimbursement of previously paid surcharges upon completion of Campbell's tobacco cessation program, 2) the plan failed to provide proper notice, including notice of retroactive reimbursement, and that physician recommendations would be accommodated, and 3) Campbell breached its fiduciary duties by administering a noncompliant plan.¹³ To support his position, the plaintiff principally relied on the statutory phrase "full reward," contending that it compels retroactive reimbursement to place tobacco users on equal footing with non-tobacco users for the entire plan year.¹⁴

Campbell moved to dismiss on standing and merits grounds. Campbell argued that the plaintiff's failure to allege any participation in, or intention to participate in, the tobacco cessation program was fatal to the plaintiff's Article III standing because the alleged injury could not be traced to the program's purported deficiencies.¹⁵ Campbell further argued that the plaintiff lacked standing to assert his disclosure claim because "the mere failure to receive information allegedly required by statute does not satisfy Article III's injury-in-fact requirement."¹⁶ On the merits, Campbell contended that the statutory phrase "full reward" guarantees parity in the reward – not retroactive reimbursement – and that the DOL's regulations do not carry the force of law or warrant deference.¹⁷

In opposition, the plaintiff contended that any wellness program containing a substantive defect under ERISA is invalid, rendering all tobacco surcharges imposed under such a program discriminatory.¹⁸ The plaintiff argued that because Campbell's wellness program failed to provide a compliant reasonable alternative standard – one that includes retroactive reimbursement – Campbell could not impose any surcharge in the first place.¹⁹ On the regulatory question, the plaintiff argued that the preamble to the DOL's 2013 regulations should inform the court's understanding of "full reward" and that the DOL's interpretation should receive deference.²⁰

The Courts' Decisions

Plaintiffs Lack Article III Standing

Both courts addressed Article III standing, though with different focal points. In Williams, the court dismissed the plaintiffs' self-dealing fiduciary breach claim for lack of standing after analyzing the plaintiffs' fiduciary duty claims in "two distinct buckets of conduct": 1) administering a discriminatory plan in violation of ERISA and 2) misusing plan assets for the Company's own benefit.²¹ Though the court found that standing existed for the first bucket (which was derivative of the surcharge claims), it concluded that the second advanced an independent theory requiring its own standing analysis.²² The court found the plaintiffs' theory of harm was "murky at best," noting that the plaintiffs failed to identify any concrete, individual injury from the alleged misuse of surcharge proceeds – particularly because, as tobacco users, they would not have benefitted from any reduced premiums.²³ The court emphasized that asserting a breach of fiduciary duty claim in a representative capacity on behalf of the plan does not exempt plaintiffs from demonstrating individual Article III injury in fact.²⁴

In Spencer, the court took a different approach to the Article III standing question. The court found that the plaintiff's payment of the weekly tobacco surcharge constituted an injury in fact.²⁵ However, the court concluded that the plaintiff could not satisfy the traceability or redressability requirements for standing because he never alleged that he participated in, intended to participate in or would have participated in Campbell's tobacco cessation program but for the program's alleged deficiencies.²⁶ The court emphasized that allowing a theory in which any alleged defect in a wellness program renders the entire program and, therefore, all tobacco surcharges unlawful to confer standing, without some allegation connecting the defect to the plaintiff's own circumstances, would "dilut[e] the Article III standing requirement."²⁷ The court separately found that the plaintiff lacked standing on his notice claim because the complaint alleged only a "purely informational injury" without pleading facts demonstrating that the alleged notice deficit hindered the plaintiff's ability to avoid adverse consequences.²⁸

The "Full Reward" Requirement Does Not Mandate Retroactive Reimbursement

The courts reached the same conclusion on the "full reward" question but through different analytical paths. In Williams, the court rejected the plaintiffs' argument that Target's plan documents did not provide for retroactive reimbursement of the tobacco surcharge.²⁹ The court concluded that Target reasonably construed the annual surcharge as a single, indivisible liability such that qualifying for an exemption midyear resets the participant's yearly obligation to zero, entitling the participant to reimbursement of earlier deductions.³⁰ As such, the court found that the summary plan description "provides for retroactive reimbursement in compliance with the 'full reward' required by ERISA."³¹

In Spencer, the court conducted a more extensive statutory interpretation analysis of "full reward" and concluded that the phrase does not mandate retroactive reimbursement as a matter of law.³² The court found that the adjective "full" means "complete" or "whole" and serves to guarantee parity in the "ultimate reward" – i.e., "it ensures, for example, that Defendant does not give an employee who completes [the tobacco cessation program] a lesser reward (e.g., a partial surcharge) than an employee who was tobacco-free from the start."³³ The court noted the absence of any reference to "retroactive" or "reimbursement" in the statutory text and found that reading "full reward" to require retroactive relief would conflict with the statute, which expressly permits plan sponsors to choose between offering a "discount" or a "rebate" upon "adherence" to a wellness program.³⁴

The DOL's Regulatory Notice Requirement Is Not Entitled to Deference or Required Under ERISA

The Williams and Spencer courts held that ERISA does not require physician-accommodation notice.

In Williams, the court applied a two-step framework – 1) "[d]oes the … statute require physician-accommodation notice?" and 2) "[i]f the statute does not require physician-accommodation notice, is the regulation nevertheless entitled to some deference as an exercise of delegated authority to implement the statute's more general notice requirement?" – and answered both questions in the negative.³⁵

For the first step, the court applied its "independent judgment in determining the meaning of statutory provisions" as required by the U.S. Supreme Court's decision in Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024).³⁶ The court examined the Public Health Service Act's (PHSA) plain text and concluded that Congress enumerated precisely two items for disclosure in 42 U.S.C. § 300gg-4(j)(3)(E): 1) the availability of a reasonable alternative standard and 2) the possibility of waiver.³⁷ Notice that a physician's recommendations will be accommodated is not one of the required disclosures. The court found this omission to be significant because "the expression of one thing excludes others not expressed."³⁸

The court further observed that subparagraph (E) of the PHSA functions as part of a safe-harbor checklist: If a wellness program satisfies each enumerated requirement, it "shall not violate" ERISA.³⁹> The court noted that reading the statute to allow agencies to add disclosure requirements beyond those Congress specified would undermine this safe-harbor structure.⁴⁰

For the second step of the analysis, the court acknowledged that the Loper Bright decision recognized that Congress may still delegate authority to agencies, including empowering them to "fill up the details" of a statutory scheme.⁴¹ However, the court distinguished between general grants of rulemaking authority and specific delegations that trigger deferential "reasoned decisionmaking" review.⁴²

The court found that the statutes the plaintiffs cited – 29 U.S.C. § 1191c (authorizing the Secretary to promulgate regulations "necessary or appropriate to carry out the provisions of this part") and 42 U.S.C. § 300gg-4(n) (providing that nothing in the section "shall be construed as prohibiting" the Secretaries from promulgating regulations) – are general housekeeping delegations, not specific mandates.⁴³ The court noted that such general citations "are noticeably absent from the examples offered by the Loper Bright Court as delegations of discretionary authority warranting reasoned decisionmaking review."⁴⁴

The court further distinguished other tobacco-surcharge cases that found the regulation to be enforceable, noting that many did not analyze the issue under Loper Bright, and those that did acknowledged undeveloped briefing.⁴⁵ The court ultimately concluded: "Seeing no specific statutory mandate here, the Court declines to deviate from its independent judgment that ERISA itself does not require Target to disclose that it will accommodate physicians' recommendations."⁴⁶

The Spencer court reached the same conclusion on notice through a broader attack on the regulatory framework. The court addressed and rejected the plaintiff's reliance on the DOL's 2013 regulations and their preamble on three independent grounds.⁴⁷ First, the court held that the preamble's retroactivity language does not carry the force of law because preambles have not undergone full notice-and-comment rulemaking.⁴⁸ Second, the court declined to defer to the DOL's interpretation of "full reward" as used in the body of the 2013 regulations, finding no genuine ambiguity in the term and further applying the "anti-parroting doctrine," which provides that an agency does not acquire special authority to interpret statutory language when its regulation merely paraphrases that statutory language.⁴⁹ The court also noted that the DOL's interpretation constituted an "ad hoc" litigating position rather than a "considered judgment" entitled to deference.⁵⁰ Finally, the court found that even if the preamble were treated as part of the 2013 regulations, the regulations would not be entitled to deference under Loper Bright.⁵¹

On the issue of notice specifically, the Spencer court held that to the extent the notice claim rested on the failure to inform participants of retroactive reimbursement, it fails because ERISA does not mandate retroactive relief and that the physician-accommodation notice requirement in the DOL regulations was carved "out of whole cloth without a statutory foothold."⁵²

The Remaining Fiduciary Breach Claims Fail as a Matter of Law

Because both courts concluded that the at-issue plans do not violate ERISA, the plaintiffs' remaining claims for breach of fiduciary duty – which depended on the existence of an underlying ERISA violation – were also dismissed.⁵³

Conclusions and Considerations

The Williams and Spencer decisions are significant developments for plan sponsors and fiduciaries, providing guidance on multiple fronts. The Williams decision establishes that plaintiffs challenging fiduciary self-dealing must identify a concrete, individualized injury – even when suing in a representative capacity on behalf of the plan. The Spencer decision goes further, holding that a plaintiff who never enrolled in or attempted to enroll in the employer's tobacco cessation program cannot establish the traceability and redressability elements of Article III standing.

In addition, both decisions provide a detailed analysis of the DOL's authority to impose notice requirements beyond those Congress enumerated, which has broader implications for the enforceability of agency regulations across the ERISA landscape.

If you would like assistance with reviewing and evaluating your plan document or wellness program disclosures, or if you have any questions about the impact of the tobacco surcharge litigation on your business or wellness plan, please contact the authors or another member of Holland & Knight's ERISA Litigation Team.

Notes

¹  No. 24-CV-3748 (NEB/DJF), 2026 U.S. Dist. LEXIS 162130 (D. Minn. July 22, 2026).

² No. 24-9882 (RMB/SAK), 2026 U.S. Dist. LEXIS 162244 (D.N.J. July 22, 2026).

³ No. 24-CV-3748 (NEB/DJF), Am. Compl. (ECF No. 34) ¶ 1.

⁴ Id. ¶ 3.

⁵ Id. ¶¶ 47-49.

⁶ No. 24-CV-3748 (NEB/DJF), Mot. to Dismiss (ECF No. 40) at 29-32.

⁷ Id.

⁸ Id.

⁹ Id. at 16-18.

¹⁰ No. 24-CV-3748 (NEB/DJF), Opp. (ECF No. 46) at 41-45.

¹¹ Id. at 17-23.

¹² Id. at 28-32.

¹³ No. 24-9882 (RMB/SAK), Compl. (ECF No. 1) ¶¶ 47-70.

¹⁴ Id. ¶¶ 29, 31.

¹⁵ No. 24-9882 (RMB/SAK), Mot. to Dismiss (ECF No. 32-1) at 11-19.

¹⁶ Id. at 19.

¹⁷ Id. at 23, 28-29.

¹⁸ No. 24-9882 (RMB/SAK), Opp. (ECF No. 33) at 15-16.

¹⁹ Id. at 26-35.

²⁰ Id. at 23-26.

²¹ Williams, 2026 U.S. Dist. LEXIS 162130, at *8.

²² Id.

²³ Id. at *9.

²⁴ Id.

²⁵ Spencer, 2026 U.S. Dist. LEXIS 162244, at *20.

²⁶ Id. at *17-19.

²⁷ Id. at *22.

²⁸ Id. at *24-25.

²⁹ Williams, 2026 U.S. Dist. LEXIS 162130, at *14.

³⁰ Id. at *13-14.

³¹ Id. at *14.

³² Spencer, 2026 U.S. Dist. LEXIS 162244, at *45-52.

³³ Id. at *47.

³⁴ Id. at *49-50.

³⁵ Williams, 2026 U.S. Dist. LEXIS 162130, at *15.

³⁶ Id. at *16 (citation omitted).

³⁷ Id. at *16-17.

³⁸ Id. at *17 (citation omitted).

³⁹ Id.

⁴⁰ Id. at *17-18.

⁴¹ Id. at *19.

⁴² Id. at *19-20.

⁴³ Id. at *20.

⁴⁴ Id. (citation omitted).

⁴⁵ Id. at *21.

⁴⁶ Id. at *22.

⁴⁷ Spencer, 2026 U.S. Dist. LEXIS 162244, at *51-58.

⁴⁸ Id. at *53.

⁴⁹ Id. at *54-56.

⁵⁰ Id. at *56 (citation omitted).

⁵¹ Id. at *56-58.

⁵² Id. at *58-59.

⁵³ Williams, 2026 U.S. Dist. LEXIS 162130, at *22; Spencer, 2026 U.S. Dist. LEXIS 162244, at *59-60.