Cash Awards and Reimbursements from Employer Wellness Programs are Taxable
The Memo was drafted in response to questions posed by Stephen Tackney, Deputy Associate Chief Counsel (Employee Benefits), regarding the taxability of wellness program benefits and employer reimbursement of premiums provided on a pretax basis under an Internal Revenue Code (“IRC”) §125 cafeteria plan. The Memo addresses the following two specific issues:
- May an employer exclude from an employee’s income under IRC §105 or §106 cash rewards paid to an employee for participating in a wellness program?; and
- May an employer exclude from an employee’s income under IRC §105 or §106 reimbursements of premiums for participating in a wellness program if the premiums for the wellness program were originally made by salary reduction through an IRC §125 cafeteria plan?
The Office of Chief Counsel concluded in the Memo that an employer may not exclude from an employee’s gross income payments of cash rewards for participating in a wellness program and an employer may not exclude from an employee’s gross income reimbursements of premiums for participating in a wellness program if the premiums for the wellness program were originally made by salary reduction through an IRC §125 cafeteria plan.
Background
Premiums for accident or health coverage paid by an employer are excluded from gross income under IRC §106(a). In addition, under IRC §105(b) employees can exclude from gross income amounts received through employer provided accident or health coverage if they are paid to reimburse an employees’ expenses for medical care for personal injury or sickness. Amounts excluded under these two IRC sections are, thus, not subject to income tax withholding as are the reimbursement of employee’s medical care expenses from FICA and FUTA taxes.
Under IRC §125 cafeteria plan rules, salary reduction for the purchase of health insurance is not includable in an employees’ gross income and the coverage is excludable under IRC §106 as employer provided accident or health insurance.
Coverage by an employer provided wellness program that provides medical care under IRC §213(d) is generally excludable from gross income under IRC §105(b). However rewards, incentives or other benefits that are provided by a medical plan that are not defined as medical care under IRC §213(d) are includable in employees’ income, unless they qualify for an exception as an employee fringe benefit under IRC §132. An example of an exception would be a de minimis fringe benefit. A de minimis fringe benefit is defined as any property or service that is so small, that accounting for it would be unreasonable.
In addition, the IRS, in Revenue Ruling 2002-3, held that an employer’s reimbursement of an employees’ pretax salary reduction used to pay health insurance is not excludable from gross income and is subject to applicable withholding and payroll taxes.
Facts
The Memo provides three factual situations related to benefits offered under an employee wellness program. These benefits are offered to employees regardless of whether or not they enroll in other comprehensive health coverage. In each situation, the wellness programs offer health screening and other health benefits, classified as an accident and health plan under IRC §106.
Situation 1
An employee who participates in a free employee wellness program may earn cash rewards of varying amounts or benefits that don’t qualify as IRC §213(d) medical expenses. As outlined in the Memo, an example of a benefit that doesn’t qualify as IRC §213(d) medical expense would be gym membership fees.
Situation 2
An employee who elects to participate in the wellness program pays a required contribution via salary reduction through an IRC §125 cafeteria plan. Similar to the first situation, employees may earn cash rewards of varying amounts or benefits that don’t qualify as IRC §213 medical expenses.
Situation 3
The same facts as Situation 2, however, one of the benefits available under the wellness program includes a reimbursement of all or a portion of the required employee contribution for the wellness plan made through salary reduction.
Findings
As outlined above, the Office of Chief Counsel concluded in the Memo that both cash awards and reimbursements of wellness premiums made through an IRC §125 cafeteria plan are not excludable from an employees’ gross income.
In addition, the Office of Chief Counsel found that any reward, incentive or other benefit provided by a medical program that is not considered medical care under IRC §213(d) is includable in an employees’ gross income, unless specifically excludable as an employee fringe benefit under IRC §132. The gym membership fees mentioned in the Memo that are not medical care under IRC §132 are not excludable from employee’s income even if offered through a wellness plan since the fees are considered a cash benefit that is not excludable as a de minimis fringe benefit. Cash rewards received from a wellness program also don’t qualify as the reimbursement of medical care or excludable fringe benefit.
The reimbursements fall under Revenue Ruling 2002-3. This Revenue Ruling supports that IRC §105 and IRC §106 exclusions do not apply to employer paid reimbursements for health coverage excludable under IRC §106(a) including salary reduction under an IRC §125 cafeteria plan. The reimbursement amounts are also includable in income and subject to applicable withholding and employment taxes.
In each of the above situations, if an employee earns a cash reward under a wellness program, it is includable in gross income. If the employee earns the reward of a benefit, the fair market value of the reward is also includible in the employees’ gross income and subject to applicable withholding and employment taxes.
In the third situation, the fact that the payment to employees representing reimbursements for all or a portion of the premiums paid by salary reductions is not distinguishable from Revenue Ruling 2002-3. Accordingly, there is no exclusion for amounts paid to employees as reimbursements of a portion of the premium for the wellness program that is excluded from income under IRC §106(a), including salary reductions under IRC §125. The Memo states that the reimbursement amounts in the third situation are also includible in the employees’ gross income and subject to applicable withholding and employment taxes.
Conclusion
A wellness program can be beneficial to employers and employees in many ways; however, it generally does not offer additional tax savings. It is important to understand that benefits such as cash or gym memberships are not excludable from gross income if offered through a wellness program.
A copy of the Memo may be accessed here:
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