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It’s Tax Season! Is Your Wellness Program Meeting Reporting Obligations?

Few people enjoy reading or talking about tax issues, but they do arise in workplace wellness programs, particularly when those programs offer incentives. If your wellness program offers cash or cash equivalent incentives (such as gift cards), premium reimbursements or other incentives, this blog post is for you.

Generally speaking, expenses for “medical care” are not subject to income tax or federal withholding. IRC s. 213. There is a long history as to why that is, but for purposes of this blog, let’s just say that Congress made the decision a long time ago. What constitutes “medical care” are expenses for the diagnosis, prevention or treatment of a specific defect. That means that most wellness expenses are not medical care expenses because those expenses generally relate to the general improvement of one’s health (unless you can show that the wellness expenses were to treat a specific disease, which might happen with some disease management programs).

As a result, employer incentives for wellness expenses are most often subject to income tax. That means gym membership reimbursements, weight loss program reimbursements, cash or gift cards are likely subject to tax. So are premium reimbursements in many cases. That is, if an employer “rewards” an employee for meeting a wellness goal by reimbursing part of that employee’s health insurance premium, that reimbursement must be reported as income and is subject to tax. This was made clear by the IRS in a memorandum it released in April 2016. Thus, even though the original premium paid by the employee may have been excluded from income tax (i.e., paid with pre-tax dollars in a cafeteria plan), an employer’s reimbursement of those premium payments is subject to income tax withholding.

“…Incentives for wellness expenses are most often subject to income tax. That means gym membership reimbursements, weight loss program reimbursements, cash or gift cards are likely subject to tax.”

There is a relevant exception to taxable wellness incentives: de minimis incentives. See IRC s. 132(a)(4). These incentives include awards such as t-shirts, certain event tickets, healthy snacks, water bottles and the like. Because these awards are so small, employers do not need to account for it at tax time. The IRS has determined previously that items with a value exceeding $100 could not be considered de minimis, even under unusual circumstances.

Another relevant exception is wellness rewards consisting of employer contributions to health Flexible Spending Accounts (FSAs), Health Reimbursement Accounts (HRAs) or Health Savings Accounts (HSAs). To qualify for this tax exemption, the employer must meet certain requirements, such as nondiscrimination and cafeteria plan rules, which can be quite complex and beyond the scope of this blog.

Who is Responsible for Reporting the Wellness Benefit on a W-2 and Withholding Tax?

Even if an employer uses a third-party wellness vendor to administer the wellness program, it is typically the employer’s responsibility to report the wellness incentive as income on the employee’s W-2 and withhold all appropriate income tax. However, there may be instances when a third party (such as a health insurer for an insured group health plan) administers a wellness program that provides a taxable incentive (e.g., cash or a gift card), and the third party is actually deemed the “statutory employer” for purposes of complying with related income and employment tax withholding and Form W-2 reporting responsibilities (in contrast to the general rule that imposes these obligations upon the common law, or “true,” employer). IRC § 3401(d).

Whether an insurer or other third party constitutes the statutory employer for this purpose is very fact-specific, and generally turns on which entity has “control of the payment” of the taxable reward or incentive (i.e., which party determines when an employee is eligible for the incentive, provides funding for the incentives, etc.). If the third party’s role with regard to the incentive is more ministerial and the real decision-maker with regard to who qualifies for the incentive as well as who funds the incentive lies with the employer, then the third party generally would not have any related withholding or reporting obligations. In those cases, the common law employer would have the obligation to comply with the relevant requirements.

So, if you are a wellness vendor charged with decision making authority on who qualifies for an incentive and you distribute that incentive, then you may have the obligation to report the incentive as income on an employee’s W-2 and to withhold appropriate income tax. It may be a good idea to consult with a tax lawyer or accountant to confirm your reporting and withholding obligations.

Barbara J. Zabawa
President of the Center for Health and Wellness Law, LLC