IRS clarifies tax treatment of wellness program benefits and employer reimbursements

The IRS has clarified that employers may not exclude from employees’ gross income either payments of cash rewards for participating in wellness programs or employer reimbursements of premiums paid by employees (originally via salary reduction through a cafeteria plan) for wellness program participation. The guidance was set forth in a recent memorandum to Tax Exempt and Government Entities (TEGE) Division Counsel senior attorney Mark Ericson.

The guidance addresses several examples, including one in which an employer’s wellness program provides health benefits such as health screening, so that it generally qualifies as an accident and health plan under Code Sec. 106. In this example, participating employees may also earn cash rewards and gym membership fees under the program. In this instance, the IRS states that the health screenings and other medical care provided by the wellness program are excluded from gross income, but the cash rewards earned are not. In addition, the fair market value of other rewards such as gym memberships are included in employees’ gross income. The result is generally the same for a second example in the guidance, whereby employees who elect to participate in their employer’s wellness program pay a contribution by salary reduction through a Code Sec. 125 cafeteria plan.

A different result is obtained in a third example, however, where an employer offers, as an available benefit under the wellness program, a reimbursement of all or a portion of employee contributions to the wellness plans that employees make via salary reduction. The IRS explains that, where an employee is given a choice in a cafeteria plan between a cash benefit and health coverage, the amount of an employee’s salary reduction used to purchase health coverage is not included in gross income, but the cash benefit is. Furthermore, under previously-issued IRS Revenue Ruling 2002-3, employer reimbursements are not excludable from an employee’s gross income where the reimbursements are for amounts that employees had reduced from their salaries to pay for health insurance coverage that was excluded from gross income.

Therefore, a reimbursement by an employer to an employee for premiums paid via salary reduction for participation in a wellness plan must be included in the employee’s gross income, even where the salary reduction was chosen under terms of a cafeteria plan. The reimbursement is considered a payment of wages subject to employment tax.

SOURCE: IRS Office of Chief Counsel Memorandum, May 27, 2016.

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