Employers may have to include in an employee’s taxable income the cash rewards for participating in a wellness program, the IRS said in a memo.
Issued May 27, the chief council advice memorandum 201622031 reviews whether an employer can exclude wellness plan cash rewards from an employee’s income under Sections 105 and 106.
Employers don’t have to include in an employee’s taxable income coverage defined as medical care under Section 213(d) or employee fringe benefits excludible under Section 132, the memo said.
On the other hand, wellness plan cash awards can’t be excluded from income because they don't qualify as de minimis fringe benefits, the IRS said. De minimis fringe benefits are defined under Section 132(e) as any property or service that is “so small” that accounting for it wouldn't be reasonable, the IRS said.
The memo notes that a tee-shirt would be considered a non-taxable de minimis fringe benefit, but employer-paid gym membership fees would not be considered a non-taxable de minimis fringe benefit.
The memo may not be used or cited as precedent, it said.
Because workplace wellness program participation is typically low, employers are increasingly turning to incentives to motivate participation, a recent Kaiser Family Foundation report said.
In 2015, 11 percent of employers offering health benefits offered incentives for employees to participation in a wellness plan, complete a health risk assessment or complete biometric screening, the Employer Health Benefit Survey said.
According to the report, there are about 24.1 million covered individuals in large firms that offer a financial incentive for wellness program participation.
Most of these firms (65 percent) offer incentives in the form of cash, gift cards or other merchandise, the report said. The firms that offer cash incentives typically offer between $1 and $500.
Firms are offering non-cash incentives, too. The report said that 34 percent of firms offer health plan premium or cost sharing discounts as an incentive and 19 percent offer other incentives such as paid time off.
See related article, Cash Reward for Wellness Plan Participation Is Taxable.
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