H&W Taxability of Wellness Incentives

If you offer a wellness program with incentives, are you taxing those incentives appropriately?

The IRS recently released a memo that provides clarification with regard to the tax treatment of certain wellness incentives.  Specifically it provides 3 scenarios which address:

  • cash rewards,
  • gym membership fees, and
  • reimbursements of premium that had been paid through a cafeteria plan.

In each of these scenarios, it is made clear that these types of incentives do not qualify as section 213(d) medical expenses and are viewed as cash fringe benefits that would be taxable as income to the employee.

“Coverage by an employer-provided wellness program that provides medical care as defined under section 213(d) is generally excluded from an employee’s gross income under section 106(a), and any section 213(d) medical care provided by the program is excluded from the employee’s gross income under section 105(b).  However, any reward, incentive or other benefit provided by the medical program that is not medical care as defined under section 213(d) is included in an employee’s income, unless excludible as an employee fringe benefit under section 132.

Section 132(e) defines a de minimis fringe (benefit) as any property or service the value of which is so small as to make accounting for it unreasonable or administratively impracticable.  Under Section 1.132-6(c), a cash fringe benefit (other than overtime meal money and local transportation fare) is never excludable as a de minimis fringe benefit.”

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