Legal Updates


WELLNESS AND TAXES

March 13, 2018

Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.

— Benjamin Franklin, in a letter to Jean-Baptiste Leroy, 1789[1]

https://www.cbsnews.com/news/25-apple-watch-comes-with-a-major-catch/

A nationwide experiment in operant conditioning is underway to increase employee wellness and contain health insurance costs.  Wellness reward programs are in full swing.  Health plan participants can redeem points for submitting to biometric screenings, meeting daily activity goals or walking a million steps while wearing a tracker.  Meeting activity goals can result in employee gift cards, free fitness trackers, discounted Apple watches or the more mundane, but valuable, health insurance deductible “credits.”

This development would seem to be a win-win-win.  In addition to prominent product placement, rewards vendors like Apple and health insurers like United Healthcare obtain valuable aggregated data that would, if disaggregated, be unusable HIPAA-protected health information.  Employers can set aside the “stick” of higher plan costs and use some nice “carrots” to contribute to employee well-being and, perhaps, reduce health plan costs in the long-term.  Finally, employees get free stuff and improve their health. 

What could go wrong?  Taxes.

Internal Revenue Code (IRC) § 106(a) excludes the cost of employer-provided health insurance coverage from an employee’s gross income.  However, the arrangement must be insurance and not simply employer reimbursement arrangements.  See, Helvering v. Le Gierse, 312 U.S. 531 (1941). IRS Rev. Rul. 2007-47.  Insurance requires risk shifting and risk distribution.

To exclude employer payments for activities related to employee health from income and, consequently, from wages for FICA/FUTA tax purposes, the arrangement must involve a risk of economic loss or the fortuitous occurrence of a stated contingency.  An employer payment that is merely an investment or a hedge on a business risk is not insurance.

In light of the preceding precedent, there are certain situations where employer or insurer wellness rewards could result in tax consequences for the employee and employer.

First, when the average benefits paid or predicted to be paid by the employer through a self-funded wellness plan greatly exceed the employee’s after-tax premium contributions, the IRS could characterize the excess as income to the employee.  The IRS may decide that the difference between the premium and the wellness payment is income subject to withholding and payroll tax.  For instance, a self-funded wellness plan that makes a fixed cash wellness payment to employees that is much larger than the employees’ premium share may create a tax consequence for the employee and a payroll tax obligation for the employer.   

The above result could occur even when the wellness payment is made through a third party like the wellness plan’s third party administrator or the employer’s health insurer.  The IRS views these third parties as the plan sponsor’s agents and could attribute third party wellness payments to the employer.

Second, gift cards and cash equivalent gifts are never excludable as benefits.  See, IRC § 132(e); Treas. Reg. § 1.132-6(b).  When employees are given the choice between two or more benefits, one of which is taxable cash and one is nontaxable employer-provided health insurance, the cash is taxable to the employee unless the choice is provided through an IRC Section 125 cafeteria plan. 

A choice between a gift card or other material item and a more expensive health insurance premium would have to be structured within an IRC Section 125 plan to avoid inclusion of the incentive as income to the employee.  Providing a gift card or other incentive within a wellness plan does not elevate the gift card to a tax-exempt employer contribution toward the cost of group health plan coverage.

Low cost incentives like t-shirts for members of the “One Million Steps Club” should be considered “de minimis” by the IRS and, therefore, not included in employee income.  In addition, incentives that would otherwise qualify as covered medical benefits under the employee’s group health plan (e.g., a smoking cessation program) are excluded from employee income.  Health-related items like an employer-subsidized gym membership, however, would be subject to income and payroll tax as a cash payment to the employee, even if the gym membership is provided through the employer’s wellness plan.

Similarly, a wellness program cannot offer employer contributions toward an employee’s health insurance premium that was already paid on a tax-exempt basis through a cafeteria plan.  A wellness rewards plan that pays a premium “bonus” or other incentive to employees who achieve a wellness goal will create income and payroll tax liability for the employee and employer if the premium “bonus” reimburses the employee for the employee’s health insurance premium paid on a pre-tax basis.  This is the proverbial prohibited “double-dipping” where a benefit cost that is already tax-exempt cannot be reimbursed on a tax-exempt basis.

Wellness program rewards may help employees improve their health which, in the long run, will reduce health insurance costs for employers.  However, incentive rewards within the wellness program can become taxable income to the employee and wages for payroll tax purposes if they are not properly structured.

For questions regarding this article, please contact your Strang, Patteson, Renning, Lewis & Lacy, s.c., attorney.

[1]  Smyth, Albert Henry (1907). The Writings of Benjamin Franklin, Vol. X (1789-1790). New York: MacMillian. p. 69.

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