Wellness Programs Bite the Dust...Not An Excludable Fringe Benefit Under Certain Circumstances

William Delaney, EA
Westwood, MA

May an employer exclude from an employee’s income under IRC Sections 105 or 106 cash rewards paid to an employee for participating in a wellness program?

May an employer exclude from an employee’s income under IRC Sections 105 or 106 reimbursements of premiums for participating in a wellness program, if premiums for the program were paid by salary reduction through a Section 125 cafeteria plan?

Those commonly offered options to employees were addressed by the IRS Office of Chief Counsel in Chief Council Advice 201622031 (4/14/16).

The CCA noted that “Under Section 106(a), an employee may exclude from income premiums for accident or health insurance coverage that are paid by an employer.  Also, under Section 105(b), an employee may exclude amounts received through employer-provided accident or health insurance if those amounts are paid to reimburse expenses incurred by the employee for medical care…”

“Coverage by an employer-provided wellness program that provides medical care as defined under Section 213(d) is generally excluded from an employee’s gross income…”  “However, any reward, incentive or other benefit provided by the medical program that is not medical care as defined under Section 213(d) is included in an employee’s income, unless excludible as an employee fringe benefit under Section 132.”



“…the employer payment of gym membership fees (which) do not qualify as medical care…would not be excludible from the employee’s income, even if provided through a wellness plan or program, because payment or reimbursement of gym fees is a cash benefit that is not excludible as a de minimum fringe benefit.  Cash rewards received from a wellness program (also) do not qualify as the reimbursement of medical care…or as an excludible fringe benefit…and, therefore, are not excludible from an employee’s income.”

Likewise, the CCA noted that reimbursement through a Section 125 cafeteria plan also would fail the excludible test and made specific reference to Rev. Rul. 2002-3.

CONCLUSION:  An employer may not exclude from an employee’s gross income payments of cash rewards for participating in a wellness program.