Whether or not certain payments made to employees who participated in an employer’s wellness program was discussed in CCA 201622031.

The memorandum was looking at programs that attempted to differentiate themselves from the program described in Revenue Ruling 2002-3.  As the IRS described that ruling:

Revenue Ruling 2002-3, 2002-3 I.R.B. 316, addresses the situation in which an employer has an arrangement under which employees may reduce their salaries and have the salary reduction amounts used to pay health insurance premiums for the employees. In addition, that employer makes payments to the employees that reimburse a portion of the amount of health insurance premiums paid by salary reduction. Revenue Ruling 2002-3 holds that the exclusions under sections 106(a) and 105(b) do not apply to amounts that the employer pays to employees to reimburse the employees for amounts paid by the employees for health insurance coverage that was excluded from gross income under section 106(a) (including salary reduction amounts pursuant to a cafeteria plan under section 125 that are applied to pay for such coverage). Accordingly, the reimbursement amounts are included in the employee's gross income under section 61, and are wages subject to employment taxes under sections 3121(a), 3306(b), and 3401(a).

The question in this case was whether payments made related to employer sponsored wellness programs could avoid the fate of the payments in Revenue Ruling 2002-3, thus not having to be included in the employee’s compensation and not having to be counted for payroll tax purposes.

The first case offers various incentives as part of an employer paid wellness program.  As the IRS described the situation:

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.

As you may be able to guess, the fact that the payments don’t qualify as §213(d) expenses (which are medical expenses eligible for a deduction on Schedule A) is a problem.  As the IRS notes:

Coverage by an employer-provided wellness program that provides medical care as defined under section 213(d) is generally excluded from an employee's gross income under section 106(a), and any section 213(d) medical care provided by the program is excluded from the employee's gross income under section 105(b). However, any reward, incentive or other benefit provided by the medical program that is not medical care as defined under section 213(d) is included in an employee's income, unless excludible as an employee fringe benefit under section 132.

Section 132(e) defines a de minimis fringe as any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer's employees) so small as to make accounting for it unreasonable or administratively impracticable. Under § 1.132-6(c), a cash fringe benefit (other than overtime meal money and local transportation fare) is never excludable as a de minimis fringe benefit.

A wellness program that provides employees with a de minimis fringe benefit, such as a tee-shirt, that would satisfy the requirements to be excluded under section 132(e) would provide a benefit that would be excluded from an employee's income notwithstanding the fact that the de minimis fringe benefit (the tee-shirt) is not medical care under section 213(d). However, the employer payment of gym membership fees that does not qualify as medical care as defined under section 213(d) would not be excludible from the employee's income, even if provided through a wellness plan or program, because payment or reimbursement of gym fees is a cash benefit that is not excludable as a de minimis fringe benefit. Cash rewards received from a wellness program do not qualify as the reimbursement of medical care as defined under section 213(d) or as an excludible fringe benefit under section 132, and therefore are not excludible from an employee's income.

The IRS then goes on and puts a §125 plan into the mix, describing the program as follows:

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.

It should come as no surprise that paying for the plan via a pre-tax contribution to a §125 plan does not somehow magically make the gym membership fees nontaxable compensation—rather, they again must be included as income.

Finally, the IRS throws one more set of options into the mix, keeping the §125 plan but giving the employee reimbursements of the insurance premiums:

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.

Of course, reimbursing the premiums seems to duplicate what the IRS didn’t like in Revenue Ruling 2002-3.  And, as it turns out, that is the view taken by the author of the memorandum:

In addition, in Situation 3, that the payment to employees of reimbursements for all or a portion of the premiums paid by salary reduction is made through a wellness plan does not distinguish this arrangement from the arrangement addressed in Revenue Ruling 2002-3. Accordingly, the exclusions under sections 106(a) and 105(b) do not apply to amounts paid to employees as reimbursements of a portion of the premium for the wellness program that is excluded from gross income under section 106(a) (including salary reduction amounts pursuant to a cafeteria plan under section 125 that are applied to pay for such coverage). Accordingly, the reimbursement amounts are included in the employee's gross income under section 61 and are payments of wages subject to employment taxes under sections 3121(a), 3306(b), and 3401(a).