Employees Can’t Deduct Wellness Indemnity Plans From Their Taxes, IRS Says

The Internal Revenue Service announced June 9 that wellness indemnity payments under a fixed-indemnity insurance policy count toward gross taxable income and cannot be treated on a tax-favored basis.

A wellness indemnity program as described by the IRS is one in which salary is deducted on a pre-tax basis and then used to reimburse the employee for various health wellness benefits, such as a weight-loss program, nutritional guidance, or diabetes management. Since this effectively sends the employee’s money back to them for non-medical expenses, it should count toward taxable gross income, the IRS memo said.

The IRS provides an example of what such a plan might look like. Employees at a hypothetical business pay $1,200 in pre-tax monthly premiums into a wellness program through a cafeteria plan by way of salary deduction and then receive $1,000 in compensation for wellness expenses (which would make sense if you save more than $200 in taxes). The example shows someone effectively buying something with pre-tax dollars and then being compensated with un-taxed dollars for a non-medical expense.

This observation would only apply to the extent that the employee actually has no un-reimbursed medical expenses, according the Groom Law Group: “if an employee receives a wellness indemnity payment under a fixed indemnity health insurance policy and the employee paid the premiums by a pre-tax salary reduction through a cafeteria plan, the payment will be included in the employee’s gross income as wages subject to FICA, FUTA, and Federal income tax withholding to the extent the employee does not have any unreimbursed out-of-pocket medical expenses related to the payment.”

The IRS memo is Chief Counsel Advice, according to Groom, and is therefore not formal guidance but “an indication of the IRS’s views on an issue.”