A small business guide to fringe benefits taxes
A healthy workforce can significantly contribute to the health of a company’s bottom line. The prospect of increased productivity and decreased healthcare costs provides an incentive for employers to do what they can to promote their employees’ well-being. For many businesses, doing so involves wellness programs that encourage employees to have screenings, make lifestyle adjustments, exercise, and participate in other activities designed to help them avoid illness and chronic health conditions.
While these programs offer benefits to employees and employers alike, the rewards and incentives given to participating workers are just that – benefits. As with all employee benefits, they raise tax implications that companies need to address appropriately if they want to avoid an unfavorable diagnosis from the IRS.
Wellness Program and De Minimis Fringe Benefits Tax Under the Internal Revenue Code
All employee compensation and non-de minimis fringe benefits are taxable under the Internal Revenue Code unless a specific exemption applies. As such, non-exempt compensation and benefits must be treated as gross income on an employee’s Form W-2 and are subject to federal income and employment tax withholding.
The tax treatment of a company wellness program and whether it is subject to any exemptions depends on the nature of the employee incentives as well as the benefits included in the program itself.
For incentives, rewards, and prizes given to employees for participation, the value is part of the employee’s gross income and is subject to payroll taxes, unless otherwise exempted.
While you should always consult with a seasoned tax advisor to discuss the specifics of your program and how it should be treated for tax purposes, common wellness program incentives and features are generally accounted for as follows:
Which wellness fringe benefits fall under the tax code:
- Cash and cash equivalents (such as gift cards): taxable income
- Employer payment of health club, gym, or fitness center memberships: taxable income (except in rare circumstances where membership qualifies as medical care)
- On-site fitness center or exercise facility owned by the employer and used mainly by employees and their families: non-taxable fringe benefit
- Health classes or seminars: non-taxable fringe benefit
- T-shirts, water bottles, event tickets, small prizes: non-taxable fringe benefit
- Reduction in employee contribution to group health plan: non-taxable medical care expense
Are Fixed-Indemnity Wellness Plans Taxable?
Many employers have structured their wellness programs as “fixed-indemnity” plans. In this arrangement, an employee makes a pre-tax premium payment to join and participate in the program. As the employee hits certain benchmarks or participates in specific activities, they earn a cash benefit, essentially earning back the amounts they paid to avail themselves of the program benefits.
According to the IRS memorandum, such incentive payments are taxable and must be included in the employee’s gross income and wages.
Call Us to Discuss Your Company’s Wellness Plan
If you have questions about the tax treatment of your company’s wellness program or wish to discuss how to optimally structure such a plan, please contact us. We welcome the opportunity to assist you.