Are Wellness Benefits Taxable?

are wellness benefits taxable

Wellness programs are being marketed to employers as ways to help employees reduce their health insurance costs. However, many of these programs offer rewards and incentives that are not tax-free under the Internal Revenue Code.

The IRS issued a recent memorandum and information letter that addresses these issues. The memo outlines three fact scenarios, including one where the employee contributes through salary reduction through a cafeteria plan.

How do I know if a wellness benefit is taxable?

Wellness programs are an employer-sponsored program designed to improve and promote health and fitness. They typically involve premium discounts, cash rewards, gym memberships and other incentives to participate.

While many of these benefits are tax-free to employees, a recent IRS memo (IRS Memorandum 201622031; December 16, 2016, cited in this article) concluded that cash rewards and non-cash benefits received through a wellness program are subject to taxable income.

The gist of this IRS memo is that cash and non-cash rewards and incentives are included as income to recipients under Code section 213(d) and under Code section 132(e). That means the fair market value of these items must be imputable to recipients for taxable purposes.

On the other hand, health screenings and other medical care provided under a wellness program are generally excluded from recipients’ income under Code section 106(b) or under Sec. 104(3(3)). In this way, fixed-indemnity payments under wellness benefit plans are tax-free to recipients.

What is a wellness benefit?

Wellness benefits are a way for companies to encourage employees to improve their health by offering financial assistance for healthy lifestyle activities. These programs help boost employee morale, increase productivity and reduce turnover.

Wellness programs are also offered by local and state governments, as well as insurance companies. They provide a range of health related services, such as smoking cessation programs, weight loss education and fitness challenges.

There are many different types of wellness programs, but they all focus on promoting and encouraging healthy behaviors. These habits are rooted in nutrition, physical activity and stress management.

Generally, the ADA prohibits discrimination against individuals with health status as long as they participate in voluntary workplace wellness programs. However, two new federal laws limit the use of financial incentives to promote workplace wellness.

What are the tax implications of a wellness benefit?

As health care costs continue to rise, employers are finding creative ways to help their employees manage their health and wellness. In response, insurance promoters have created a number of wellness benefits that are often touted as tax-free benefits that will save employers money.

The tax implications of these wellness benefits vary depending on the type of program offered. Some wellness programs provide health screenings and other benefits that qualify as medical care under Section 213(d) of the Internal Revenue Code.

Other wellness programs may include cash rewards, such as gym memberships or gift cards, that are not medically necessary. These amounts are included in a employee’s income for FIT, FITW, FICA and FUTA purposes unless the amount is excludable as an exempt fringe benefit under IRC Section 132.

The IRS has issued several memoranda clarifying which wellness benefits are taxable and which are excluded from a taxable wage base. It is important for employers to closely examine these benefits and ensure that they are not triggering employment tax reporting and payment requirements (see, e.g., Cumings, “IRS Continues to Play Whack-a-Mole With Wellness Plans,” 155 Tax Notes 1394 (June 5, 2017)).

How do I design a wellness benefit?

Wellness programs are gaining popularity, not only as a means of motivating employees but also as a cost-effective means of controlling healthcare costs. They typically include an array of wellness activities, a wide range of prizes (think healthy snacks and water bottles) and even some perks for employees’ family members.

When it comes to the nitty gritty of implementing your company’s wellness program, the best strategy is to make it as easy on employees as possible while still complying with IRS rules and regulations. A good way to achieve this is through a well-designed and administered WIMPER – wellness incentive medical reimbursement program. This type of benefits program allows you to give your employees a cash bonus in exchange for participating in your company’s wellness activities, resulting in lower health insurance premiums and a happier workforce. The best part is that you can do it all in one go, making it the best way to reward your employees for their efforts and get the most bang for your buck.