IRS Chief Counsel Advice 201622031 (April 14, 2016)
Available at https://www.irs.gov/pub/irs-wd/201622031.pdf
The IRS has released a Chief Counsel Advice (CCA) memorandum analyzing the tax treatment of certain wellness incentives, including cash rewards and reimbursements of wellness program premiums that were paid on a pre-tax basis. The CCA examines three factual scenarios—all involving wellness programs that provide health screenings and other health benefits and generally qualify as health coverage that can be excluded from an employee’s gross income under Code § 106(a). In one scenario, the program is provided at no cost to employees. In the other two scenarios, employees electing to participate in the wellness program must pay a premium on a pre-tax basis through a Code § 125 cafeteria plan. All three programs offer rewards for participation in the form of cash or other benefits that do not qualify as Code § 213(d) medical expenses. One, however, also rewards participants with reimbursements of all or a portion of their wellness program premiums. Here are highlights:
Cash Rewards. The CCA explains that any reward, incentive, or other benefit that is not medical care is included in an employee’s income unless it is an excludable fringe benefit under Code § 132. Code § 132(e) defines an excludable 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. But cash benefits are never excludable as de minimis benefits, so cash wellness rewards—regardless of the amount—must be included in the employee’s gross income. [EBIA Comment: The IRS previously has stated that, under this rule, gift cards are treated the same as cash (see our Checkpoint article).]
Gym Fees and Other Nonexcludable Rewards. The CCA explains that there may be rewards, such as T-shirts, that qualify as de minimis rewards that can be excluded from income. Payment of an employee’s gym membership fees, however, would not be excludable from income because it is a nonexcludable cash benefit. The fair market value of any nonexcludable reward must be included in income and subject to employment taxes.
Reimbursement of Premiums Paid Tax-Free Through a Cafeteria Plan. The CCA notes that in Revenue Ruling 2002-3, (see our Checkpoint article) the IRS previously addressed the reimbursement of health insurance premiums paid by salary reduction and concluded that the exclusions for health coverage and health benefits would not apply. The CCA concludes that the result is no different if the premium reimbursements come in the form of rewards under a wellness program.
EBIA Comment: Recently, certain wellness program designs have been promoted as a way to provide tax-free payments to employees. The details vary, but often they involve taking employee salary reductions as wellness program premiums and then returning some or all of the premiums to employees as untaxed “premium reimbursements” or other rewards. These and similar arrangements (a new twist of the classic “double-dipping” scheme) have been informally rejected by the IRS, and this CCA reinforces and explains that position. Employers who are offered any scheme to save on taxes by implementing a wellness program should consult legal counsel. For more information, see EBIA’s Consumer-Driven Health Care manual at Section VI.C.1 (“Taxation of Employer-Provided Rewards”) and EBIA’s Cafeteria Plans manual at Section X.H (“No Reimbursement for Health Insurance Coverage Already Paid on a Pre-Tax Basis”). See also EBIA’s Fringe Benefits manual at Section VII.F (“De Minimis Fringe Benefits: Wellness Rewards”).
Contributing Editors: EBIA Staff.