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- a reminder to employers to evaluate their current wellness program designs and prepare to make changes, if needed, prior to the 2017 open enrollment period later this year.
- a reminder to employers to evaluate their current wellness program designs and prepare to make changes, if needed, prior to the 2017 open enrollment period later this year.
Complete a biometric screening and receive a gift card. Visit the gym weekly and the cost of your membership is covered. Employers are providing more incentives for employees to take care of their health and in return, are realizing significant benefits. A 2010 study by Harvard Business Review found that employers who invest in workplace wellness programs saved on health insurance premiums, reduced absenteeism and time off for medical care, enjoyed greater productivity and improved employee morale.
A recent Chief Counsel Advice (CCA) memorandum from the IRS reminds employers and their employees that certain benefits provided by workplace wellness programs are taxable income to the employee.
CCA 201622031 was released last month to address the income tax treatment of payments that an employer makes to employees in connection with a workplace wellness program. Not surprisingly, the CCA takes the position that cash rewards and reimbursements are taxable income to the employee, subject to income tax withholding and payroll taxes.
The CCA did not mention a particular case, but presumably a regional office of the IRS encountered a workplace wellness program in which the employer believed it was making non-taxable payments to employees under Section 105 or 106 of the Internal Revenue Code. Section 105(b) allows employees to exclude from income amounts received through employer-provided accident or health insurance if those amounts are paid to reimburse expenses for medical care for the employee or dependents. IRC Section 106 allows an employee to exclude from income premiums for accident or health insurance coverage that are paid by an employer.
In the CCA, the IRS laid out three slightly different wellness program designs:
- Employer provided its employees with a no-cost wellness program which was separate from the employer’s comprehensive health coverage. The wellness program provided health screenings and other health benefits such that it qualified as an accident and health plan. Employees who participated in the program earned cash rewards or benefits that did not qualify as Section 213(d) medical expenses, such as gym membership fees.
- Employer provided a wellness program similar to the first scenario except the employees that chose to participate were required to pay a premium through Section 125 cafeteria plan salary reductions.
- Employer provided a wellness program similar to the above except the employer reimbursed all or a portion of wellness program premiums paid by the employees through the Section 125 cafeteria plan.
In all scenarios, the IRS held that the cash payments and premium reimbursements could not be excluded from the employee’s taxable income.
The CCA serves as a reminder to employers to evaluate their current wellness program designs and prepare to make changes, if needed, prior to the 2017 open enrollment period later this year. Any reward, incentive or other benefit that is not medical care must be included in an employee’s income unless is it an excludable fringe benefit under IRC Section 132. De minimis fringe benefits include any property or service the value of which is so small as to make accounting for it unreasonable or impractical - think prizes like healthy snacks, water bottles, t-shirts or an occasional movie or sporting event ticket. Larger value items such as iPads or large fitness equipment would not be excludable.
Cash incentives, including cash reimbursements (like gym memberships) and cash equivalents (like gift cards that are easily converted to cash) are never excludable as a de minimis fringe benefit. Cash wellness rewards - regardless of the amount - must be included in the employee’s gross income.
Employers that find their plan designs are not in compliance with the CCA interpretation may need to take corrective action, including adjustments to withholding and payroll tax adjustments, amended employment tax returns and W-2s - an action that is likely to irritate employees who suddenly find themselves needing to amended tax returns that have already been filed.
