“Sick” Wellness Plans – IRS Chief Counsel Memorandum Reminds Employers to Consider Tax Consequences of Wellness Benefits and to Avoid Double Dipping Arrangements
The IRS recently released a Chief Counsel Memorandum (CCM 201622031 https://www.irs.gov/pub/irs-wd/201622031.pdf) addressing the tax treatment of certain wellness program benefits and reimbursements of pre-tax premiums paid under a Section 125 cafeteria plan. Shortly before the release of this CCM several questionable “wellness programs” being promoted in the market were brought to our attention. The programs had varying names and features, but typically promised tax savings for both the employer and employees. The programs generally involved a fairly significant employee pre-tax contribution to participate, a requirement to engage in certain wellness activities, and a cash or cash-like reward characterized as a “reimbursement.” Some promotional materials may even have indicated that the ability to achieve additional tax savings was the result of changes made to the law under the Affordable Care Act (“ACA”). In some cases, the promotor also indicated having received a legal opinion that the program complied with applicable law.
CCM 201622031 describes three situations related to employer-sponsored wellness programs. In each situation, it concluded that the benefits received by the participant were taxable income.
In the first situation, the IRS described a wellness program provided by the employer at no cost to employees consisting of health screenings and other health benefits. Employees participating in the wellness program were provided cash rewards and other benefits that do not qualify as Section 213(d) medical expenses (e.g., gym membership fees). The IRS confirmed that such cash rewards and non-medical expenses are included in the participant’s income even though the wellness program itself qualifies as an accident and health plan under Section 106 of the Internal Revenue Code (the “Code”).
In the second situation, the IRS addressed a wellness program consisting of health screenings and other health benefits. Like the first situation, the wellness program qualified as an accident and health plan under Section 106 of the Code. In contrast to the first situation, under this wellness program, employees pay a “premium” to participate in the program. In turn, that premium is paid on a pre-tax basis through a Section 125 cafeteria plan. Employees participating in the wellness program are provided cash rewards. The IRS confirmed that such cash rewards are included in the participant’s income even though the wellness program itself qualifies as an accident and health plan under Section 106 of the Code.
In the third situation, the IRS analyzed a wellness program similar to that described in the second situation except that instead of a cash reward, one of the benefits available to participants is a “reimbursement” of all or a portion of the premium initially paid by the participant to participate in the program. The IRS confirmed that such “reimbursements” are included in the participant’s income even though the wellness program itself qualifies as an accident and health plan under Section 106 of the Code. [This arrangement involves what is sometimes referred to as “double dipping” because employees are being “reimbursed” for an expense that was previously paid on a pre-tax basis.]
NOTE: In each situation, the IRS drew a distinction between the tax consequence of making the wellness program available to participants and the tax consequence of the rewards or benefits provided under the wellness program. The IRS indicated that because the wellness programs involved the provision of health care (e.g., health screenings), the program was an accident or health plan for purposes of Section 106 of the Code. As a result, the cost of coverage under the wellness program was not taxable to employee when paid by the employer and could be paid by employees on a pre-tax basis through a Section 125 plan. The tax consequences of the benefits received are analyzed separately. Section 105 of the Code provides an income exclusion for benefits provided under a health plan, but only to the extent the benefits pay or reimburse expenses for medical care (as defined in Section 213(d) of the Code). Accordingly, the IRS indicated payments received by the participants (whether in the form of rewards or reimbursements) were taxable because they were not reimbursements for medical care expenses incurred by the participant.
The take away. Although the CCM did not indicate it was being issued to address any particular program or product, we suspect the questions addressed in the CCM were triggered by wellness programs similar to some of the programs we have seen promoted recently. The CCM does not necessarily mean that adopting a particular wellness program will create adverse tax consequences. It does, however, remind employers to be vigilant in properly vetting benefit programs before implementing them. All of the wellness program pieces must fall within the existing Code parameters.
In light of CCM 201622031, we recommend employers take the following actions:
- Review existing wellness programs to identify the types of incentives or rewards being provided to participants and, if excluded from the participants’ taxable income, confirm that such exclusion is appropriate.
- If you are contacted by someone promoting a wellness program with non-taxable rewards, special tax savings, or zero cost to the employer and participants, review the details of the program carefully. Keep in mind that payments or reimbursements to participants generally are taxable unless they are reimbursing medical care expenses actually incurred by the participant.
- If you have any questions or concerns about a particular program, seek the assistance of qualified counsel.
Please contact us if you have questions or are in need of assistance with reviewing the tax issues related to wellness programs.
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The information contained in this ALERT is intended for general information purposes only and does not constitute legal advice relative to a specific situation.