The IRS has warned employers and employees who participate in “self-funded” health plans, that some of the benefits of certain plans are being misrepresented as “tax-free.”
The type of plans in question, which are usually self-funded, fixed-indemnity health plans, claim to provide employees with “tax-free” compensation when they are paid incentives to participate in certain “wellness activities.”
The IRS warned in a memorandum that promoters of these plans often entice employers to participate in them by claiming that the cash incentives employees receive under these programs are not subject to income or employment taxes.
However, according to the letter put out by Office of Chief Counsel (OCC) of the IRS, “an employer may not exclude from an employee’s gross income payments of cash rewards for participating in a wellness program.”
What the IRS warns about health & wellness plans
According to the OCC, these plans present situations where the amounts received by employees for participating in wellness and/or health-related activities (such as calling into a toll-free number to receive health information) are greater than what they pay in premiums. When this occurs, the excess amount is indeed considered taxable income, and subject to payroll taxes.
The letter presents three examples: one in which the program is provided to all employees at no cost and two in which the participation in the program is made through salary reduction. In all cases employees received direct payback or other compensation for participation in “wellness programs.”
In all of the examples, the IRS concludes that the programs do not qualify as federally recognized “health insurance” because in all cases the employee does not ever risk paying more in in premiums than he or she receives as a result of incentives or rewards for participation in the wellness plans.
When such plans are designed so that the amounts paid in premiums (or participation fees) will always stay below payments received, the plans do not qualify as “insurance” nor the benefits as “medical payments”—and therefore are subject to taxation.
How MBAF can help
If your company has entered into these types of arrangements, you may be held liable for not properly withholding taxes or reporting income. If you are unclear if your health plans and/ or any employee health and wellness incentive programs are in proper compliance with all federal law, contact our offices. We would be happy to help.
By Boris Rosen, CPA and Ronald D. Finkelstein, CPA/ABV of MBAF CPA’s LLC, located on 440 Park Avenue South, New York, NY 10016. Compliance issues regarding the Healthcare industry, can be quite complex. If you would like to benefit from our expertise in these areas or if you have further questions on this Advisory, do not hesitate to contact our Healthcare Specialists, or call us at 1-800-239-1474.