By Jennifer Carsen, JD, Senior Legal Editor
In a new guidance dated April 14, 2016, the IRS states that an employer may not exclude from an employee’s gross income payments of cash rewards for participating in a wellness program.
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Additionally, reimbursements of premiums for participating in a wellness program may not be excluded from an employee’s gross income if the premiums were originally made via salary reduction through a section 125 cafeteria plan.
Three scenarios considered
The IRS considered three different scenarios:
Situation 1. An employer provides all employees, regardless of enrollment in other comprehensive health coverage, with certain benefits under a wellness program at no cost to the employees. In particular, the wellness program provides health screening and other health benefits such that the program generally qualifies as an accident and health plan under section 106. In addition to those benefits, employees who participate in the program may earn cash rewards of varying amounts or benefits that do not qualify as section 213(d) medical expenses, such as gym membership fees.
Situation 2. An employer provides all employees, regardless of enrollment in other comprehensive health coverage, with certain benefits under a wellness program. Employees electing to participate in the wellness program pay a required employee contribution by salary reduction through a section 125 cafeteria plan. The wellness program provides health screening and other health benefits such that the program generally qualifies as an accident and health plan under section 106. In addition to those benefits, employees who participate in the program may earn cash rewards of varying amounts or benefits that do not qualify as section 213(d) medical expenses, such as gym membership fees.
Situation 3. The same as Situation 2, except that one of the benefits available under the wellness program includes a reimbursement of all or a portion of the required employee contribution for the wellness plan that the employee made through salary reduction.