IRS Addresses Tax Treatment of Wellness Benefits
The Internal Revenue Service (“IRS”) recently issued a memorandum (“Memorandum”) that addresses the proper tax treatment of certain wellness program benefits and employer reimbursement of premiums that are paid for with pre-tax dollars under IRS Code Section 125 Cafeteria Plans. The Memorandum provides that:
• An employer may not exclude from an employee’s income any cash rewards, including gym membership fees, paid to an employee for participating in a wellness program; and
• An employer may not exclude from an employee’s income any reimbursements of premiums for participating in the wellness program if the premiums were originally made by salary reduction through a Cafeteria Plan.
Employers should be aware that any cash rewards or premium reimbursements they provide to employees who participate in wellness programs constitute “wages” that must be included in the employees’ taxable gross income. This is primarily because participation in wellness programs that yield wellness incentives is typically not attributed to medical care.
Conclusion: If an employer is attempting to provide wellness incentives that are tax free, they should consider structuring their Cafeteria Plan to direct wellness incentives to a Health Care Flexible Spending Account as an employer contribution or direct wellness incentives towards a Health Reimbursement Arrangement (“HRA”). The claims substantiation requirements under IRS Code Section 125 and Section 105, respectively, ensure that the dollars can only be distributed with proof of qualified medical expenses under IRS Code Section 213 and/or according to HRA plan design.