Benefits & Healthcare Update: IRS Reminds Employers That Certain Nonmedical Wellness Incentives Are Taxable Income
12 July 2016
The IRS recently released a memorandum reminding employers about the tax treatment of wellness program incentives and employer reimbursement of wellness program-specific premiums. While the memorandum did not break any new ground, it is a useful recap of the IRS rules regarding the taxability of wellness incentives. Generally, wellness program incentives are taxable unless the incentive itself qualifies as a pre-tax benefit, such as reimbursing for or directly providing medical services.
The memorandum addressed two issues:
- Cash Rewards for Participating in a Wellness Program: An employer may not exclude payments of cash rewards for participation in a wellness program from an employee’s taxable income. Cash rewards also include reimbursement of gym memberships and reimbursement of the cost of a health monitoring device (i.e. Fitbit).
- Premium Reimbursement for Participating in a Wellness Program: An employer may not exclude reimbursements of premiums for participating in a wellness program from an employee’s taxable income.
Many employers do not have a separate premium for the wellness program itself, but the principle applies when a plan has a contribution differential for its wellness incentive. When a wellness plan either penalizes noncompliant participants with a surcharge or rewards compliant participants with a lower contribution, the surcharge/lower contribution is considered an incentive and the difference between the compliant and noncompliant contributions is taxable income.
- Example 1: Employees get $50 back every month for not smoking or taking a smoking cessation course. The $50 is taxable income.
- Example 2: Employees pay $50 less per paycheck for participating in a disease management program. The $50 is taxable income.
Employers with wellness programs should check their wellness programs to see whether they offer incentives that should be taxable income.
A copy of the IRS memorandum can be found here: https://www.irs.gov/pub/irs-wd/201622031.pdf
If you have any questions regarding compliance matters with wellness programs and wellness incentives, please contact Ed Doherty at 646-839-8251 or via email at EDoherty@cammackhealth.com.