The Internal Revenue Service, Office of Chief Counsel issued a memorandum confirming that an employer may not exclude from an employee’s gross income payments of cash rewards for participating in a wellness program.
The Memorandum answered questions from an employer who provided employees with cost-free benefits under a wellness program. The program offered health screening and other health benefits. In addition to the health benefits, employees who participate can earn cash rewards or other rewards such as gym memberships.
The IRS held that coverage under the wellness program itself was not taxable to the employee because it was excluded as medical care. However, any reward or other benefit provided by the program would be included in income, unless it could be excluded as a fringe benefit under Section 132 of the Internal Revenue Code as a de minimis fringe benefit.
A Code section 132 de minimis fringe benefit is any property or service in which the value of it is so small as to make accounting for it unreasonable of administratively impracticable. If the wellness program provided a t-shirt, or something else small, that would be excluded from an employee’s income (even if not medical care). However, payment of gym membership fees does not count as medical care and would not be de minimis to be excluded from income. The amount would be taxable to the employee.
The Memorandum can be found here.
Employers should consider tax implications when implementing wellness program rewards.