Garrett Fenton Discusses IRS Memo Clarifying Taxability of Wellness Incentives in SHRM Online

"IRS Reminds Employers: Wellness Incentives Are Taxable"
SHRM Online

Garrett Fenton discussed a recent IRS chief counsel advice (CCA) memorandum clarifying the taxability of workplace wellness incentives in SHRM Online. The CCA "signals that the IRS is looking at these issues," Fenton said. Wellness programs have "flown under the radar with employers," he added, noting there may not be clear communication between HR, which typically oversees wellness programs, and the CFO's office, responsible for tax reporting. The memo holds that reportable gross income for an employee includes, among other things, employer-provided cash rewards and non-medical care benefits for participating in a wellness program. Fenton points out that some employers may have incorrectly assumed that a lower value gift card incentive would be considered de minimis by the IRS. "What [the tax memorandum] hammers home is that there is no de minimis exception for cash or a cash equivalent gift," Fenton said. "It doesn't matter if it's a $1 gift card in theory. It would be taxable and subject to withholding and reporting if you're distributing those types of gift cards to employees."

If reporting omissions occur, penalties can be significant. "The real risk is that an employer that fails to include the taxable incentive in wages as they should, in box 1 of Form W-2, could be looking at information reporting penalties assessed per employee per return, which can get pretty steep," Fenton pointed out. Also, if employers fail to provide withholding on taxable incentives, "you've got potential penalties there as well," he said.

Though most small logo items are considered de minimis, a further area of caution is in providing trinkets as incentives to enrollees in group medical coverage. "There could be an argument that the employee has effectively purchased that item with pretax dollars through the cafeteria plan, which could be problematic" from a tax standpoint, "although the IRS has never really addressed it," Fenton said.

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