Listen up Payroll and HR professionals. The IRS recently released clarification regarding the tax treatment of wellness program benefits.
Questions
- May an employer exclude from an employee’s income under section 105 or section 106 cash rewards paid to an employee for participating in a wellness program?
- May an employer exclude from an employee’s income under section 105 or section 106 reimbursements of premiums for participating in a wellness program if the premiums for the wellness program were originally made by salary reduction through a section 125 cafeteria plan?
Specifics of Situations
Situation 1.
An employer provides all employees, regardless of enrollment in other comprehensive health coverage, with certain benefits under a wellness program at no cost to the employees. In particular, the wellness program provides health screening and other health benefits such that the program generally qualifies as an accident and health plan under section 106. In addition to those benefits, employees who participate in the program may earn cash rewards of varying amounts or benefits that do not qualify as section 213(d) medical expenses, such as gym membership fees.
Situation 2.
An employer provides all employees, regardless of enrollment in other comprehensive health coverage, with certain benefits under a wellness program. Employees electing to participate in the wellness program pay a required employee contribution by salary reduction through a section 125 cafeteria plan. The wellness program provides health screening and other health benefits such that the program generally qualifies as an accident and health plan under section 106. In addition to those benefits, employees who participate in the program may earn cash rewards of varying amounts or benefits that do not qualify as section 213(d) medical expenses, such as gym membership fees.
Situation 3.
The same as Situation 2, except that one of the benefits available under the wellness program includes a reimbursement of all or a portion of the required employee contribution for the wellness plan that the employee made through salary reduction.
Discussion
In Situations 1, 2, and 3, the coverage provided by the wellness program is excluded under section 106(a) as coverage under an accident and health program. The health screenings and other medical care as defined under section 213(d) provided to employees by the program are excluded from the employees’ income under
section 105(b). If an employee earns a cash reward under the program, the amount of the cash reward is included in the employee’s gross income under section 61 and is a payment of wages subject to employment taxes under sections 3121(a), 3306(b), and 3401(a). Similarly, if the employee earns 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 is included in the employee’s gross income under section 61 and is a payment of wages subject to employment taxes under sections 3121(a), 3306(b), and 3401(a).
In addition, in Situation 3, that the payment to employees of reimbursements for all or a portion of the premiums paid by salary reduction is made through a wellness plan does not distinguish this arrangement from the arrangement addressed in Revenue Ruling 2002-3. Accordingly, the exclusions under sections 106(a) and 105(b) do 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 section 106(a) (including salary reduction amounts pursuant to a cafeteria plan under section 125 that are applied to pay for such coverage). Accordingly, the reimbursement amounts are included in the employee’s gross income under section 61 and are payments of wages subject to employment taxes under sections 3121(a), 3306(b), and 3401(a).
Bottom Line Answers
- An employer may not exclude from an employee’s gross income payments of cash rewards for participating in a wellness program.
- 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.
Until Next Time, Be Audit-Secure!
Lisa Smith
