This means that employers can ratchet up the smoker penalties without worrying if those penalties drive a plan up to unaffordable status (meaning more than 9.5% of an employee's household income, or W-2 wages under the safe-harbor). However, those penalties could make an employer's plan unaffordable if used for any wellness rationale other than tobacco/smoking. I.e., an employer's attempt to drive better health with wellness spankings or doggie treats are all fun and games but can never cause an employee to pay more than 9.5% of income without triggering a possible PPACA unaffordability penalty back to the employer.
Here is how Timothy Jost explains it at Health Affairs:
[W]here an employer-sponsored plan includes a nondiscriminatory wellness program that offers incentives that affect premiums, these premium reductions are treated as earned in determining an employee’s or a related individual’s required contribution if the incentives relate to tobacco use. Wellness program incentives that do not relate to tobacco use are treated as not earned. That is to say, if the employee’s premium would be reduced if the employee participated in a tobacco-cessation program, the affordability of the coverage is determined by assuming the employee participates. For other wellness programs, however, affordability is determined by assuming the employee does not participate and thus does not earn the incentive, so that an employee does not have to pay the tax penalty simply for not participating in a wellness program.
