A small number of operators in the benefits industry have been selling so-called “tax-free” wellness programs to employers. IRS has taken notice, but not in a good way.
The pitch goes something like this: An employer offers employees certain benefits under a wellness program. Employees pay for these wellness program “benefits” to via salary reductions through a section 125 cafeteria plan. The wellness program then provides certain health benefits. Sometimes, in addition to those benefits, employees who participate in the program may earn cash rewards of varying amounts or benefits that do not qualify as section 213(d) medical expenses, such as gym membership fees or a reimbursement of all or a portion of the required employee contribution for the wellness plan that the employee made through salary reduction.
In other words, pay for wellness benefits on a pre-tax basis, and then—after enjoying those benefits—get reimbursed on a tax-free basis as well.
Over the past two years or so Ameriflex has been bombarded with requests for opinions on these plans from partners and clients. We have consistently opined that such plans violate the “no-double-dipping” rule by which IRS has abided for many years. While we too would certainly appreciate seeing these plans in the marketplace from a purely employer-based perspective, it has been clear to us that they would not be viable under IRS rules, which—generally speaking—prohibit the non-taxability of the same dollar (i.e., “double-dipping”).
The bottom line here is that these plans were always a little too good to be true if you took a closer look. And indeed they are. Don’t believe the hype; they are clearly prohibited under the tax code.