Wellness is Taxable

“I have added a wellness program that includes a gym membership. Should I just let the employee expense the membership cost or is there another way I should handle this?”

Your HR Survival Tip

Wellness programs are becoming more popular as people have learned the benefits of healthy employees. Wellness ideas can include official programs through the company’s insurance carrier or broker, gym memberships, yoga classes, and more.

The good news is that you may have healthier and more productive employees. The bad news is that IRS (Internal Revenue Service) wants everyone to pay for it. The IRS recently clarified the taxability of various wellness programs.

• Example 1: This involved a free wellness program that included health screening and other health benefits, plus provided cash rewards or benefits such as a gym membership. The health screening and other health benefits provided through the carrier qualified as a medical expense and exempt from taxation. The cash reward and gym membership, etc. were deemed taxable income to the employee.
• Example 2: This involved a section 125 cafeteria plan, also known as a medical Flexible Spending Account. If the wellness program or component is eligible under your 125 plan, it should be non-taxable. The employee is paying for the program through the 125 plan so the employer isn’t involved in the payment. If the program is not eligible and the company pays for it, it will be taxable income to the employee.
• Example 3: You have a 125 plan that will allow the wellness plan’s components so the employee pays for it. Then you choose to reimburse the employee for their cost of the wellness program. The company’s involvement in paying for the wellness program brings it back to taxable income.

In short, only the components of a wellness program that are qualified in the Internal Revenue Code as a medical expense are free from taxation. All other components of a wellness program are considered taxable income to the employee and you’ll need to add the value of those benefits to payroll so you and the employee can pay taxes on that value. IRS Publication 502 explains what they consider a medical expense, if you’re really curious.

I’m definitely not a tax expert so please check with your CPA about the taxability of the wellness programs you offer or would like to offer. Even if it’s taxable, it’s still great that you want to encourage wellness in your company. However, your employees may not be as excited if it costs them money so make sure they know up front what their cost will be to participate.