Tax Consequences of Employee Wellness Programs
Employee wellness programs are all the rage. While the concept is still relatively new, the potential implications of such programs are still being ironed out. Consider for example our recent post about how such plans can comply with other existing federal regulations. As employers struggle to make sure that their programs comply with existing regulations, another aspect of the employer wellness programs cannot be forgotten: taxes. The potential tax implications for both the employer and employee are an important aspect of any wellness program. In a recent Chief Counsel Advice (CCA) the IRS addressed what constitutes taxable income when benefits are provided to employees through a wellness program. Employers and tax-preparers should take note.
As a general matter, an employee may exclude from income employer paid premiums for accident or health insurance and any amounts received as reimbursement for medical care expenses through employer-provided accident or health insurance. The IRS recently addressed whether an employer can exclude from an employee’s income cash rewards paid for participating in a wellness program and reimbursement of premiums for participating in the wellness program if the premiums were originally made by salary deduction.
Three different factual scenarios that could raise the foregoing questions were addressed in the CCA.
First: when an employer provides all employees certain benefits under a wellness program at no cost to the employees, for example health screening. In addition to those benefits, employees may earn cash rewards such as gym membership fees.
Second: when an employee provides all employees with benefits under a wellness program and employees electing to participate in the wellness program pay a required employee contribution by salary reduction through a section 125 cafeteria plan.
Third: when the same facts as scenario two exist, but the benefits available under the program include a reimbursement of the required employee contribution for the plan that was made through salary reduction.
The CCA concluded that in all three scenarios the coverage provided by the wellness program is excluded as income under an accident and health program, this includes any health screenings or other medical care. However, if an employee earns a cash reward under the program, that amount must be included in the employee’s gross income and is considered a payment of wages subject to employment taxes. The same applies if the employee is awarded a benefit not otherwise excludable from the employee’s income, such as payment of gym membership fees. In which case, the fair market value of the reward should be included in the employee’s gross income and subject to employment taxes. Finally, any reimbursement amounts as in scenario three are in included in gross income and subject to employment taxes.
Navigating the tax code is best left to the professionals. That said, employers should be aware of the tax consequences and make sure they seek the proper tax advice. Likewise tax-preparers should take note of the tax consequences that many clients are likely to face in light of the growing trend of employer wellness programs.