May an employer exclude from an employee’s income cash rewards paid for participating in a wellness program? May an employer exclude from an employee’s income a tee-shirt provided to an employee for participating in a wellness program?

A chief advice counsel memorandum released by the Internal Revenue Service (“IRS”) on May 27, 2016 sought to answer both of the above posed questions. The memorandum concluded that an employer may not exclude, from an employee’s gross income, cash rewards paid to an employee for participating in a wellness program, but may exclude a tee-shirt provided to an employee for participating in a wellness program.

Gross income is defined in Section 61(a)(1) of the Internal Revenue Code (“IRC”) as including compensation for services, including fees, commissions, fringe benefits, and similar items. However, if an item can be classified as a de minimus fringe benefit it is excludable from the employee’s gross income under Section 132. A de minimus fringe benefit is any property or service the value of which is so small as to make accounting for it unreasonable or administratively impracticable. The perfect example, and the one discussed in the May 27, 2016 memorandum, involves a tee-shirt. If an employer gives an employee a tee-shirt for participating in a wellness program, the tee-shirt is excludable from the employee’s income because it can be classified as a de minimus fringe benefit, presumably unreasonable or impractical to account for.

Although a relatively small amount of cash in exchange for an employee’s participation in a wellness program may seem like a de minimus fringe benefit, the chief advice counsel memorandum states a cash fringe benefit is never excludable as a de minimus fringe benefit. Therefore, if an employer provides a cash reward to an employee for participating in a wellness program, the memorandum deduced this would be considered a taxable event for the employee, and the provided cash reward is includable in the employee’s gross income. Even though it may be tempting to think the cash reward should be considered a reimbursement of a medical expense, and therefore excludable, the chief advice counsel memorandum clearly finds that a cash reward in exchange for participation in a wellness program does not qualify as the reimbursement of medical care as defined under Section 213(d) of the IRC. Thus, the memorandum concludes, a cash reward paid by an employer in exchange for an employee’s participation in a wellness program is includable in the employee’s gross income.

To read the full memorandum, please visit: https://www.irs.gov/pub/irs-wd/201622031.pdf