Wellness program cash rewards not excluded from income

An employer could not exclude from an employee’s gross income payments of cash rewards for participating in a wellness program. Further, the employer could 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reimbursements of premiums for participating in a wellness program, if the premiums for the wellness program were originally made by salary reduction through a cafeteria plan.

The IRS Chief Counsel discussed three situations relating to the present case. In all three situations the coverage provided by the wellness program was excluded under Code Sec. 106(a) as coverage under an accident and health program. The health screenings and other medical care provided to employees by the program were excluded from the employees’ income under Code Sec. 105(b). If an employee earned a cash reward under the program, the amount of the cash reward was included in the employee’s gross income and was a payment of wages subject to employment taxes. Similarly, if the employee earned a reward of a benefit not otherwise excludible from the employee’s income, such as the payment of gym membership fees, the fair market value of the reward was included in the employee’s gross income and was a payment of wages subject to employment taxes.

Additionally, in the third situation the fact that the payment to employees of reimbursements for all or a portion of the premiums paid by salary reduction was made through a wellness plan did not distinguish this arrangement from the arrangement addressed in Rev. Rul. 2002-3. Therefore the exclusions under Code Sec. 106(a) and Code Sec. 105(b) did not apply to amounts paid to employees as reimbursements of a portion of the premium for the wellness program that is excluded from gross income under Code Sec. 106(a). Accordingly the reimbursement amounts were included in the employee’s gross income and were payments of wages subject to employment taxes. (IRS Chief Counsel Advice 201622031, April 14, 2016, issued June 1, 2016.)

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