On May 9, 2023, the IRS Office of Chief Counsel issued Memorandum #202323006 which clarified whether certain wellness incentive payments are subject to the Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA) and federal income tax withholding (FITW), or collectively known as “employment taxes.
The scenario described by the IRS is this:
An employer provides comprehensive health benefits through a group health plan (GHP). The GHP provides preventive care benefits such as reimbursements for the cost of flu shots and other vaccinations, without any cost sharing (thanks to the Affordable Care Act requirements). The employer also offers all employees, even those not enrolled in the GHP, a fixed-indemnity health insurance policy that provides employees with “wellness counseling, nutrition counseling, and telehealth benefits” as well as a benefit for each day the employee is hospitalized. Thus, the fixed-indemnity policy offers health coaching and a benefit if/when the employee is hospitalized.
The employee pays for this fixed-indemnity policy out of their pre-tax wages. Specifically, they pay $1200/month in pre-tax premiums. Then, if the employees actually use the wellness benefits offered (like health coaching) or if they are enrolled in the GHP and get preventive care (like vaccinations), they can earn back $1000/month of the premium from the employer.
Some vendors are marketing these programs as a win-win proposition: employees get wellness services at no real cost to the employee or employer, because employees are practically reimbursed for using the wellness services, and they can attain greater wellbeing to boot! The vendor is presumably paid from the tax savings.
However, this arrangement assumes that the $1000/month reimbursement is excluded from employment taxes. According to the latest IRS guidance, however, it most likely is not excluded from taxation.
Specifically, the IRS memo states that unless the $1000/month payment is used to reimburse medical expenses that are not otherwise covered by the GHP or the employer, the payment counts as income that is subject to employment taxes. The employees can’t benefit from the tax exclusion twice (once at the front end with the pre-tax premium payment and again when the employee is essentially reimbursed for that premium payment).
What is interesting about this memorandum is that there is no discussion as to whether the wellness and nutrition counseling would qualify as medical expenses if the employee paid for those expenses out of pocket. If the memorandum had described a situation where the employer offered access to wellness counseling services and the employee paid for those services out-of-pocket (with after tax wages), could the employer reimburse the employee for those expenses tax-free? Or, better yet, can the employee use funds from a Health Savings Account or Flexible Spending Account to pay for the wellness services? The question is whether the IRS would consider the wellness counseling services as medical care. We have written much on that topic. See, e.g., https://www.welcoa.org/blog/using-irs-medical-care-guidance-achieve-health-coaching-compliance/ and https://www.welcoa.org/blog/regulation-employee-assistance-programs-eaps/. Right now, the only sure way to use tax-free dollars to pay for wellness coaching is if there is a medical need for it, verified by a physician. See https://www.integrativenutrition.com/blog/making-health-coach-services-more-accessible.
The IRS would benefit the wellness industry by further clarifying when wellness services count as medical expenses that could be reimbursed by an employer without being subject to employment taxes. The IRS had that opportunity with its latest memorandum, but chose to skip over that question. Instead, it left readers perplexed from an implication that if the employee had paid for wellness counseling out of pocket, the employer could reimburse the employee with tax-free dollars. That confuses other guidance that states wellness counseling could qualify as a medical expense only if it has a supporting letter of medical necessity from a licensed health care provider.
Hey IRS, next time you write about wellness services, please make your messaging consistent as to when wellness services can qualify as medical care, and when it does not. Because there are a lot of blurry lines out there when it comes to health and wellness.
If you are a wellness provider or employer sponsor of wellness services, please contact our firm to get help with legal compliance today. We also have health coaching templates and other useful forms available for the health and wellness industries. Check it out here.