The IRS is seeking to lay to rest any doubts about the taxability of certain rewards extended to employees who participate in wellness programs. In a recent memorandum (number 201622031), Stephen Tackney, the IRS Deputy Associate Chief Counsel, responded to a question involving three distinct wellness incentive scenarios. In each case, the incentives were deemed subject to income tax.

In the first scenario, employees are eligible to participate in a wellness program without charge, regardless of whether they also participate in the employer’s health plan. Because the wellness program features health screening “and other health benefits,” it qualifies as a health plan under the Internal Revenue Code’s (IRC) section 106.

In addition to those health benefits, wellness program participants also “may earn cash rewards in various amounts or benefits (e.g. gym memberships) that do not qualify as medical benefits under the tax code.” In this straightforward situation, the memo was clear: “Any reward, incentive or other benefit provided by the medical program that is not medical as defined under section 213(d) is included in an employee’s income, unless excludible as an employee fringe benefit under section 132.”

[Image credit: Bloomberg]
[Image credit: Bloomberg]

Code section 132, according to Tackney, defines a “de minimus fringe” as “any property or service, the value of which is… so small as to make accounting for it unreasonable or administratively impractical.” Under that standard, the value of, for example, a gift tee-shirt would not be taxable, but the value of a cash award or gym membership would.

The second scenario involves a section 125 cafeteria plan. As with the first scenario, employees can participate in the employer’s wellness plan regardless of whether they are receiving benefits under the main health plan and are eligible to earn cash and other rewards, including gym memberships. However, if they do participate in the wellness plan, they are required to pay a fee via a salary reduction.

Does this participation fee change the taxability of the cash incentives and gym memberships? As Tackney explains in his memorandum, wages that wind up in a cafeteria plan are not taxable “if such payment would not be treated as taxable without regard to such a plan and it is reasonable to believe that… section 125 would not treat any wages as constructively received.”

But as laid out in his opinion with respect to the first scenario, the value of those cash incentives and gym memberships are taxable, so the fact that a cafeteria plan was involved does not shield the value of those items from taxation.

In the third and final scenario, the facts are the same as in the second, except that one of the incentives is a refund of the cost of participating in the wellness program. In analyzing that scenario, Tackney once again ruled that the value of the employee wages passed through the cafeteria plan and rebated to the employee for participating in the plan are, indeed, taxable.

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