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Improving Employees’ Health and Reducing Employment Taxes Through A Wellness Plan

Posted by Brandon Keim | Jul 29, 2019 | 0 Comments

Can I receive Employment Tax Benefits and Improve my Employees' Health?

If you find yourself searching for a plan that encourages your employees to hit the gym instead of eating cake in the break room, you may stumble across some health plans that encourage employees to get healthy and saves you money.  Unfortunately, sometimes the employment tax benefits that are presented to employers can be defective and can eventually lead your business into a costly IRS Employment Tax Audit where the tax benefits that you thought had been structured correctly must be paid back to the government.

In general, healthy employees are going to be more productive, happier, and take fewer sick days than employees who do not take care of their health.  The idea of finding a health plan that offers tax benefits while also helping make your team of employees more productive sounds like a great concept.  But some companies are incorrectly reducing their employees' taxable wages with the cash reward that is being provided to the employees.  Some third-party companies decided to package wellness programs in a way that would save employers in employment taxes and increase employee's health.  There are several different types of Wellness Programs available including Participatory programs and Health-Contingent programs.  Two types of Wellness plans that are available have employees meet criteria to receive an annual discount on their insurance premiums, or have employees receive monetary rewards for participating in a wellness program.  The monetary rewards become problematic to employers. 

While Employment Taxes are not computed on insurance premiums paid by employees under section 106 of the Internal Revenue Code, monetary rewards that are provided to employees for participating in a wellness program are subject to employment taxes and are included in the employee's wages under section 3121 of the Code unless they are being reimbursed for qualifying medical expenses like co-pays or hospital visits.  Some employers have participated in wellness programs that have been promoted to them by professionals that have these monetary rewards specifically excluded from their employees' wages and therefore never paid any employment taxes on these rewards.  The IRS is finding these defective wellness plans that are rewarding employees with cash, and not paying employment taxes on these amounts. 

What should you do If you are an employer who has a wellness program that is excluding monetary rewards from their employees' wages? Consult a tax professional to review the wellness plan and employment tax implications to see if it is in fact one of these defective plans.  If the plan is defective, the next step is to terminate the plan and potentially adjust employment tax returns to reflect the correct amount of wages to the employees.  If your business is already being audited by the IRS for a potentially defective wellness plan, you may be able to have penalties and interest abated if you relied on the advice of a professional when you made decisions regarding participating in a wellness plan promoted to you.  Consult a tax professional to determine if this is the case for you.

About the Author

Brandon Keim

A Certified Tax Law Specialist, CPA, partner at Frazer Ryan Goldberg & Arnold LLP, and former Senior IRS Trial Attorney, Brandon Keim holds an LL.M. in Taxation from Georgetown University Law Center.

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