The Internal Revenue Service (IRS) has issued General Counsel Memorandum 201622031 addressing wellness programs’ tax treatment of certain wellness incentives, including cash rewards and reimbursements of wellness program premiums that were paid on a pre-tax basis. Their analysis also shot down an "innovative" yet illegal "Benefit Bank" wellness approach that was being promoted by some.

Benefit Bank Wellness Approach Shot Down

The specific concept (often touted as "ACA compliant") varies, but typically involves an employee contribution on a pre-tax basis toward a wellness benefit account or bank.  The amount is paid back to the employee, who then uses it to pay health plan premiums or for other benefits like life insurance.  The money effectively runs through the Section 125 plan twice, something IRS authorities denounce as “double-dipping.”  The various industry promoters promise big savings to the employer that primarily results from avoidance of FICA taxes (which is illegal). 

Although the IRS does not mention vendors by name (and neither can we), the arrangements are definitely impermissible.  Using this approach can result in standard and willful IRS penalties for failure to withhold and pay income and employment taxes (instead of “double-dip” tax savings, the employer can find itself facing a “double-dip” of penalties).  Moreover, while the vendors often shared convoluted legal opinions, the lawyer's analysis is typically incomplete and loaded with disclaimers.  In short, if a tax scheme sounds too good to be true, beware! 

Other Wellness Incentive Rule Call-Outs 

The IRS General Counsel’s office also reiterates two related points in their memorandum:

1. An employer can provide a low-value (“de minimis”) wellness incentive of a particular item (for example, a water bottle or T-shirt) without creating taxable income to the employee.

  • Other more substantial incentives, like paid gym memberships, are fully taxable.  

    • The fair market value of any non-excludable reward must be included in income and subject to employment taxes.

  • 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. 

  • Cash benefits are never excludable as de minimis benefits, regardless of the amount.

2. The IRS notes that lower health coverage premium payments made by employees results in higher taxable employee income. 

  • That makes logical sense because, whenever an employee collects greater take home pay (e.g., because his or her health coverage costs less), more of that pay will be exposed to tax. 

Next Steps 

  • Employers with wellness programs should ensure they are taxing all rewards that are not de minimus. Although what is considered a low-value is not defined, it is commonly practiced to mean $20 or less, although this is not an established rule.

  • For complete details, see the memorandum hyperlinked in the article.