Most people have heard the research supporting incentives for wellness in the workplace. Outside of the intangible benefits of helping employees to stay healthy and fit, companies that take measures to create a healthier workforce have lower rates of absenteeism, lower health insurance costs, and higher productivity. However, many businesses and their employees do not realize that some taxable workplace wellness incentives to the recipients of these measures.
What CCA 201622031 Means for Your Employees
The IRS reminded employers of the taxability of these benefits in a Chief Counsel Advice memorandum released last month. Unsurprisingly, any cash or incentives given to employees as incentives for healthier living are considered taxable income. Employees should have payroll taxes withheld for these benefits or they may face a hefty tax bill next April, especially employees who take advantage of these programs regularly.
This may come as a surprise to many employers, as it was commonly believed that these programs fell under Section 105(b) and Section 106 of the tax code. Section 105(b) exempts income received from employer health insurance when this income is paid to reimburse health care expenses. Section 106 makes employer payments for health and other types of insurance tax-exempt. However, CCA 201622031 makes it clear that some money and prizes are taxable workplace wellness incentives.
Types of Taxable Workplace Wellness Incentives
Exactly what type of workplace wellness incentives are taxable income? The IRS has identified three different types that they find taxable:
- Participation rewards of cash or bonuses that do not qualify as medical expenses under Section 213(d), such as gym memberships
- Wellness programs offering cash or incentives, even when employees pay a premium
- Programs offering cash or incentives that are reimbursed under Section 125 cafeteria plans
In other words, if a wellness program offers any kind of prize worth money, it is taxable as income.
What does this mean for employers looking to improve morale and their own bottom line by encouraging workers to make healthy choices? These incentives are a proven way to get good results, but they are indeed taxable. Employees should be aware that they will be paying taxes for most incentives.
