Wellness Program Incentives May Be Taxable
Date | 01 November 2016 |
Published date | 01 November 2016 |
DOI | http://doi.org/10.1002/jcaf.22211 |
Author | Shirley Dennis‐Escoffier |
96
© 2016 Wiley Periodicals, Inc.
Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22211
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IRS
Wellness Program Incentives
May Be Taxable
Shirley Dennis-Escoffier
Many businesses that pro-
vide health insurance for
their employees have intro-
duced wellness programs to
encourage employees to make
healthier lifestyle choices in
an effort to control health care
costs. These programs typi-
cally offer discounts or other
rewards for participation in an
activity (such as completing
a health risk assessment) or
achieving a specific outcome
(such as not smoking). In a
recently issued memo address-
ing the taxation of wellness
program rewards, the Internal
Revenue Service (IRS) stated
that while de minimis ben-
efits do not result in taxable
income, cash rewards, as well
as reimbursement of premi-
ums paid by salary reduction
through a cafeteria plan, are
taxable as compensation and
subject to employment taxes.
Businesses that offer wellness
programs need to carefully
review the types of incen-
tives they offertodetermine
if they should be treating the
value ofthe rewards as taxable
compensation.
BACKGROUND
To encourage employers
to provide medical benefits for
their employees, these benefits
receive favorable tax treat-
ment. Internal Revenue Code
(IRC) Section 106(a) states that
gross income of an employee
does not include premiums for
health insurance coverage that
are paid by an employer. IRC
Section 105(b) also excludes
amounts received through
employer-provided health insur-
ance if the amounts were paid
to reimburse expenses incurred
by an employee for medical
care as defined in IRC Sec-
tion 213(d). Amounts paid by
employees for health coverage
through salary reduction under
an IRC Section 125 cafeteria
plan are also excluded from tax-
able compensation. When these
amounts are excluded from the
employee’s taxable income, they
also are not subject to employ-
ment taxes (Social Security,
Medicare, and federal unem-
ployment), providing a tax
savings for employers as well as
employees.
In addition to offering
health insurance benefits, many
employers have added well-
ness programs that can offer
a variety of health benefits
that qualify for exclusion from
taxable compensation. These
programs are classified into
two basic types: (a) participa-
tory wellness programs and
(b) health- contingent wellness
programs. Participatory well-
ness programs provide incen-
tives based solely on participa-
tion in a wellness program.
Participatory programs are
considered to comply with the
Health Insurance Portability
and Accountability Act of 1996
(HIPAA) nondiscrimination
requirements without having to
satisfy any additional require-
ments as long as they are
made available to all similarly
situated individuals. Examples
of participatory wellness pro-
grams include a fitness center
reimbursement program, a
diagnostic testing program
that does not base any reward
on test outcomes, a program
providing a reward for complet-
ing a health risk assessment, a
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