Many employers offer incentives and awards as part of their wellness programs. Though these provisions certainly can entice greater employee participation, they also can entrap unwary employers.
IRS generally considers wellness incentives paid to employees for participating in a wellness program to be fringe benefits. Fringe benefits are taxable income to the employee who receives them unless the law specifically excludes the benefits from income. Thus, unless a specific exemption applies, employers must include the cost of wellness incentives and awards in an employee’s income, withhold proper taxes and report the amounts on the employees’ W-2s. Employers who do not take these steps can face substantial tax penalties.
The good news for most employers is that typical wellness incentives -- discounted premiums, reduced deductibles or contributions to an HRA or HSA – relate directly to an employer’s group health plan. Because these incentives involve a group health plan, and they target treating and preventing disease, they are specifically excluded from income under tax code provisions granting exclusion for accident and health benefits.
Other popular rewards under wellness programs involve nominal gifts or non-cash items. For example many employers offer water bottles, t-shirts, fruit baskets and other such items. Though these are not accident and health benefits, they qualify for exclusion as what IRS deems “de minimis” benefits because they have little value.
Whether something is de minimis or not depends on the facts and circumstances of each case, but typically IRS will permit an exclusion of items having a value of between $25 and $100, as long as the items are not given out frequently enough that the sum of the items during the year reaches a total amount that no longer is de minimis. Employers should remember that cash incentives or gift cards are always includable in income regardless of the amount. This is true even of gift cards provided by third parties.
Employers can run afoul of IRS rules and unwittingly subject themselves to tax penalties if they do not properly account for the taxability of wellness incentives that are neither accident and health benefits nor de minimis benefits, or if the employer pays incentives in cash or a cash equivalent like a gift card. Employers should consult with their tax advisors to be certain to properly construct their wellness incentives.