The Internal Revenue Service (IRS), through its Office of Chief Counsel, recently released a memorandum regarding the tax treatment of wellness programs. Although the memorandum is not formal advice that may be relied on, it provides helpful insight for employers on how the IRS views certain rewards provided under wellness programs.
With increased health plan costs and greater awareness of the benefits of fitness, many employers have put in place wellness programs to contain health plan costs and encourage employees to stay healthy. Wellness programs can take many forms and offer a variety of benefits. In many cases, employers put in place wellness programs that provide health screening and other health benefits. These programs are either paid for by the employer or sometimes by the employee through a cafeteria plan. For some programs, employers will provide cash or cash-equivalent rewards such as gym membership fees that do not qualify as medical expenses under the Internal Revenue Code (Code). In addition, employers may offer to reimburse a portion of the employee contribution made through the cafeteria plan.
The IRS memorandum confirms a number of tax rules applicable to wellness programs. Generally, the coverage provided by the wellness program is excluded from an employee’s income under Code Section 106(a) as coverage under an accident and health program. Furthermore, health screenings and other medical care (as defined under Code Section 213(d)) are excluded from the employee’s income under Code Section 105(b). However, if an employee earns a cash reward under the program, the reward is included in the employee’s gross income under Code Section 61 and is a payment of wages subject to employment taxes. Similarly, if the employee earns a reward not otherwise excludible from the employee’s income, such as the payment of gym membership fees, the fair market value of the reward is included in the employee’s gross income and is a payment of wages subject to employment taxes. In addition, for employers who reimburse all or a portion of the premiums paid by the employee through a cafeteria plan for the wellness program, the reimbursement amounts are included in the employee’s gross income and are payments of wages subject to employment taxes.
When designing wellness programs, employers need to be aware that the rewards offered to employees could be taxable benefits if they are provided as cash or cash-equivalents. While certain non-cash benefits may be excludible as a de minimis fringe benefit under Code Section 132(e), such as a wellness program t-shirt, cash fringe benefits are generally not eligible to be treated as a de minimis fringe benefit.