In Memorandum 201622031, the IRS reminds employers that cash rewards from wellness programs are generally treated as taxable income to the employee. The IRS definition of “cash rewards” includes providing or reimbursing an employee for any item or expense that is not medical care (as defined under IRS Code Section 213(d)), unless the reward is an excludable fringe benefit under Section 132.

For example:

  • Reimbursing an employee for enrolling in a smoking cessation program would be allowed as medical care under Section 213(d), and therefore would not be taxable.
  • Providing access to the employer’s on-premises gym would be an excludable fringe benefit under Section 132(j)(4), and therefore would not be taxable.
  • Reimbursing an employee for the cost of an off-site gym membership is not medical care or an excludable fringe benefit, and therefore would be taxable.
  • Providing employees with cash rewards, including gift cards, is not excludable as a de minimis fringe benefit, and therefore would be taxable.

Please contact your tax advisor if you have questions or concerns about how this affects your organization.