June 10, 2016
How to Handle Tax Treatment of Wellness Rewards
Applies to: All employers
In response to vendors in the insurance and wellness market introducing certain “wellness programs” designed as a “tax savings” to employers, the IRS recently released a memorandum providing its views on the tax treatment of rewards under employer wellness plans. Though this memorandum cannot be relied on as formal advice from the IRS, it provides employers with a good understanding on the agency’s views relative to this topic.
Cash, Cash-Equivalent Rewards
The memorandum confirms that certain tax rules apply to employer-sponsored wellness programs. Although coverage, such as health screenings and other medical care, are generally excluded from an employee’s income under these programs, cash rewards or cash-equivalent rewards earned from a wellness program are different.
Per the IRS, if an employee earns a cash reward through the wellness program, the reward must be included in the employee’s gross income under Code Section 61 and is considered to be a payment of wages subject to employment taxes. Additionally, for a cash-equivalent reward, the fair market value of the reward must be included in the employee’s gross income and is also considered to be a payment of wages subject to employment taxes.
If an employer reimburses all or a portion of the employee premiums paid by salary reduction through the company’s wellness plan, those reimbursements will be included in an employee’s gross income and are considered to be payments of wages subject to employment taxes.
Although some non-cash benefits may be excludable as de minimis fringe benefits (e.g., a t-shirt for a company wellness plan), cash fringe benefits generally aren’t eligible to be treated as excludable de minimis fringe benefits.
To further clarify the IRS’s position, the memorandum sets forth two straightforward conclusions:
- “An employer may not exclude from an employee’s gross income payments of cash rewards for participating in a wellness program.” (Emphasis added.)
- “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income reimbursements of premiums for participating in a wellness program if the premiums for the wellness program were originally made by salary reduction through a section 125 cafeteria plan.” (Emphasis added.)
If you are approached by one of these vendors seeking to institute this type of program and “save you tax dollars,” please refer to this Alert and the IRS memorandum and contact your AP Employee Benefits advisor for further information.
Source: Crawford Advisors; HR Benefits Alert | IRS: Here’s how to handle the tax treatment of wellness rewards
Please contact your AssuredPartners NL Benefits Team if you have questions or need assistance with this topic or other compliance matters
Information contained herein is for educational and/or informational purposes only. The information provided may change over time as the laws and regulations change. This information is not, nor is it intended to be, legal advice and each employer or client should seek their own legal counsel for guidance regarding individual situations.Share This: