As more companies seek to offer wellness programs or incentives to their employees, issues and confusion concerning the taxability of health-related programs emerge. Guidelines outlined by the IRS address the problem at hand, allowing employers to learn more about wellness program policies and the taxes that go along with these plans. Employers are encouraged, before enrolling in health and wellness programs, to research the taxability of the incentive programs they wish to participate in. In this article, we explore the IRS-issued regulations surrounding wellness program taxability and what is considered a non-taxable wellness incentive.
The Taxable Effects of Wellness Programs
In general, all payments made to or on behalf of an employee are considered taxable wages unless a specific tax exemption applies. There is currently no specific tax exemption for wellness incentives. Accordingly, these payments are subject to the same tax rules as other employee rewards.
The IRS mandates that any employer-sponsored wellness plan, cash reward, or incentive of a similar nature that is not medical care as defined under section 213(d) is included in an employee’s taxable income. Sections 105 and 106 specify that employer-provided coverage under an accident or health plan is excludible from income. In addition, employee contributions, if paid through a section 125 plan, are also excludible from income. Under certain conditions, a wellness program may be allowed to offer premium discounts (or rebates) or cost-sharing modifications if nondiscrimination rules are satisfied. Examples may include contributions to health savings accounts (HSAs), flexible spending accounts (FSAs), or premium discounts.
Some wellness programs also offer other cash incentives which should be evaluated to determine potential tax consequences. Examples of taxable incentives include fitness center reimbursements and cash gift cards. The IRS de minimis rules allow for exclusions from income, which include payments that are unreasonable or administratively impracticable to account for. Non-taxable wellness incentives may include health seminars or classes, T-shirts, and other small prizes. The value of items such as T-shirts would not be includible in an employee’s income if the requirements of section 132 are met.
In IRS Chief Council Advice Memorandums 201622031 and 201703013, the IRS provides guidance on taxability of cash rewards paid to an employee for participation in wellness programs. The IRS has detailed three situations where employee participation in wellness programs would result in taxes on wellness payments. The examples demonstrate that regardless of the structure of wellness incentives, most incentives continue to be includible in taxable income.
While employee wellness programs are created with good intentions, as they aim to encourage healthy living, some plans have the potential to create tax consequences that employers should be aware of. For this reason, any wellness plan that an employer is enrolled in, or wishes to enroll in, should be thoroughly examined by the employer and a subject-matter expert to ensure the program aligns with IRS regulations. The IRS has taken an interest in recent plan designs being marketed. Employers should be cautioned to evaluate their wellness program provisions to ensure it is in compliance with IRS regulations. Failure to properly include wellness incentives in an employee’s taxable wages may subject the employer to penalties assessed during an IRS audit.
Sikich advisors can help you and your company evaluate the best wellness program for your employees, while also ensuring the plan meets IRS standards. Please feel free to contact us with questions regarding your organization’s current wellness plan, or to evaluate your options.