Are your wellness program incentives taxable to your employees?
08.05.2016 Yoga classes, weight loss programs, biking to work, and free health screenings are becoming a ubiquitous part of the modern workplace. A recent survey from Fidelity Investments and the National Business Group on Health (NBGH) estimates that 80% of employers now offer some kind of wellness program. In 2015, employers were estimated to spend an average of $693 per employee on wellness-based incentives, says NBGH. These programs promote worker productivity and reduce health-related costs, notes the Kaiser Family Foundation.
An important part of wellness programs are the incentives employers use to encourage employees to participate, which can include cash, gift cards, merchandise, time off, and gym membership reimbursements. However, the IRS has warned employers that many of these popular wellness incentives are not tax-free health plans, but instead are taxable to employees. In a legal memo, the IRS considered three scenarios under which an employer provided wellness program incentives to employees. The benefits were provided to all employees, regardless of enrollment in other comprehensive health coverage. In all three situations, the IRS found that the employer could not exclude cash rewards or premium reimbursements related to wellness benefits that are not considered “medical care” from an employee's income. (“Medical care” is the type of benefit that would be deductible under current tax rules.)
The three types of incentives the IRS identified as taxable are:
● Employee cash rewards for participating in wellness programs as an extra bonus under an otherwise qualified accident and health plan. The wellness program provides health screening and other health benefits. In addition, employees who participate in the program may earn cash rewards or benefits that do not qualify as deductible medical expenses, such as gym membership fees.
● Employees’ contributions to a wellness program by salary reduction through a Sec. 125 cafeteria plan. Employees who participate in the program may earn cash rewards that do not qualify as medical expenses, such as gym membership fees.
● Employer reimbursements for employee contributions by salary reduction through a Sec. 125 cafeteria plan. Employees who participate in the program may earn cash rewards or benefits that do not qualify as deductible medical expenses, such as gym membership fees.
The IRS determined that cash rewards received from the wellness program do not qualify as a reimbursement of “medical care” which can be excluded from an employee’s income. The cash rewards also do not qualify as an excludable fringe benefit. (De minimis fringe benefits are excludable from an employee’s income.) As a result, cash rewards are considered a payment of wages subject to both income and employment taxes. The IRS further held that any reimbursement by the employer of an employee’s cafeteria plan wellness contributions also must be included in the employee's income and is subject to employment taxes.
Do you have questions about the tax implications of your wellness plan? Please contact a member of Frazier & Deeter’s tax team.