Treatment of wellness program benefits and employer reimbursements under a sec. 125 cafeteria plan.

• Author: Yeh, Daphne

More and more employers are providing wellness programs to their employees in an effort to encourage them to develop healthy lifestyles. Studies show that employers can reap benefits from these programs including lower health-related costs, increased productivity, and higher employee morale, which increase their bottom line. The programs also are likely to be popular with employees. Before employees get too excited about these extra benefits, however, they need to know the IRS's position on their taxability.

The IRS released Chief Counsel Advice (CCA) 201622031 on May 27,2016, responding to two questions related to employer-provided wellness programs, about the tax treatment of benefits received and reimbursement of premiums paid through a pretax salary reduction under a Sec. 125 cafeteria plan.

Question 1: May an employer exclude from an employee's income under Sec. 105 or Sec. 106 a cash reward paid to an employee for participating in a wellness program?

In general, the CCA noted, Sec. 61(a)(1) provides that, except as otherwise provided in the Code, gross income includes compensation for services, including fees, commissions, fringe benefits, and similar items. In other words, any awards or benefits provided by employers are taxable to employees, need to be included on Form W-2, Wage and Tax Statement, and are subject to federal tax withholding, as well as Social Security and Medicare taxes.

Does that mean that employees need to include in gross income medical care costs covered by employer-provided wellness programs? Sec. 106(a) provides that an employee's gross income does not include employer-provided coverage under an accident or health plan, which means employees are not subject to taxes on any premiums for accident or health insurance coverage that are paid by their employers. Also, under Sec. 105(b), employees can exclude from gross income amounts received through employer-provided accident or health insurance for personal injuries or sickness if:

such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by him for the medical care (as defined in [Sec.] 213(d)) of the taxpayer, his spouse, his dependents ... and any child ... of the taxpayer who as of the end of the taxable year has not attained age 27. How about other cash rewards paid to employees as part of a wellness program, such as payment for gym membership fees, and other fringe benefits? Regs. Sec. 1.132-6 includes a de...