On May 12, 2017, the IRS Office of Chief Counsel released Memorandum Number 201719025, which was written April 24, 2017. The memo provides guidance related to certain wellness programs and fixed indemnity coverage.
As background, in the Feb. 7, 2017, edition of Compliance Corner, we discussed Office of Chief Counsel Memorandum 201703013, which was released Jan. 20, 2017. That memo also provided guidance related to wellness programs and fixed indemnity coverage. It’s important to understand the interaction of the guidance provided in both memos.
Under the earlier memo, if employees pay pre-tax contributions to participate in a wellness program and that program provides an incentive (i.e., payment) for performing certain activities that are not considered medical care, the incentive/payment is considered taxable income. Examples of such activities include reading a health-related article or completing a survey. That guidance remains the same.
The new memo expands the guidance to address a very specific type of wellness program that is being marketed to employers. Under this design, employees make after-tax contributions to a self-insured health plan and receive fixed cash payments for no-cost activities such as attending a health seminar or calling a telephone number and hearing health information. In many of the programs offered, the vendor claims that the payments will far exceed the employees’ contribution, therefore increasing the employee’s take home wages. In order for such payments to qualify for tax exemption, the arrangement must be insured or have the effect of insurance. This means that the arrangement must involve risk shifting and a risk of economic loss. Since the specified activities involve no risk of economic loss (such as the occurrence of a medical condition or an out-of-pocket medical expense), the office found that no risk was involved in the arrangement. Thus, the payments are taxable, to the extent that they exceed the premiums paid.
The second type of wellness program discussed in the new memo involves an employer offering employees the opportunity to make pre-tax contributions to a wellness program. The contributions are treated as payments to a flex bank. The employee can then use the flex contributions/credits to purchase other benefits such as a gym membership or whole life insurance. If the flex contributions are not used to purchase Section 125 qualified benefits (such as accident, health, medical, dental, vision, disability or group term life coverage), then the contributions are not excluded from gross income and are taxable. This includes contributions to whole life insurance and gym memberships, as these are not qualified benefits.
Fixed Indemnity Coverage
In regards to fixed indemnity coverage, the earlier memo released in January 2017 stated that benefits paid under such a policy would be taxable if the cost of the policy (i.e., premiums) was paid by the employer or by the employee with pre-tax salary reductions.
The new memo clarifies that such benefits would be taxable to the extent that they exceed the participant’s actual unreimbursed medical costs. Alternatively, if the cost of the policy is paid 100 percent by an employee with post-tax contributions, the entire benefit is excludable from gross income, even if it exceeds the participant’s actual medical expense.
Memorandum 2017-19-025 »