Cash Rewards for Wellness Program Employees Are Taxable

Jun 29, 2016 | Blog

Tax Attorney Advice

A Gallup poll estimated that in 2011, 86 percent of employees were above their normal weight. Those employees missed on average an estimated 450 million extra days of work per year compared to healthy workers, costing American businesses hundreds of billions of dollars in lost productivity.

Accordingly, many employers have since begun to incorporate corporate wellness programs for workers into their company benefits packages. These health-conscious organizations promote biking to work, encourage trips to the gym, and even put on friendly competitions for weight loss or earned steps for employees to both improve their health and win prizes along the way!

However, as all tax attorneys know firsthand, with the IRS there’s no such thing as a free lunch. So how does an employer handle tracking cash rewards paid for participating in a wellness program? Are cash prizes considered to be part of the employee’s gross income? What about a participation tee-shirt?

A chief advice counsel memorandum released by the Internal Revenue Service (IRS) last month addressed both of the above situations. The IRS tax attorney who discussed these issues in the memo concluded that an employer may not exclude cash rewards paid to an employee for participating in a wellness program from an employee’s gross income. However, employers may exclude from gross incomes small ticket items, such as a tee-shirt, provided to an employee for participating in a wellness program.

As defined by the Internal Revenue Code (IRC), gross income includes compensation for services, including commissions, fees, fringe benefits, etc. Nevertheless, if an item can be classified as a de minimus fringe benefit it is excludable from the employee’s gross income.

As an experienced tax attorney in San Jose, I receive questions about this concept often since it is a relatively unknown term. A de minimus fringe benefit is any property and/or service with a monetary value that is so negligible that accounting for it is considered to be unreasonable or administratively unpractical. The perfect example involves our aforementioned participation tee-shirt. If an employer gives an employee a tee-shirt for participating in a wellness program, the IRS’s recent memo states that it is excludable from the employee’s income because it can be classified as a de minimus fringe benefit.

Although a relatively small amount of cash in exchange for an employee’s participation in a wellness program may also be presumed to be classified as a de minimus fringe benefit, the memo clearly states that a cash fringe benefit is never excludable, no matter the amount. Even though it may also make sense for many employees to consider their potential cash prizes as a reimbursement of medical expenses and therefore excludable, the IRS’s recent memo clarifies that this is not the case.

As clearly defined by the recent memorandum, a cash reward paid by an employer in exchange for an employee’s participation in a wellness program is includable in the employee’s gross income. Therefore, if an employer were to provide a monetary incentive to an employee, this would be considered a taxable event for the employee.