Employer-sponsored wellness programs often incorporate rewards or incentives to encourage employees to participate. Because there are numerous legal requirements for wellness program design, employers sometimes overlook the federal tax implications of a program’s rewards.
As a general rule, wellness incentives are subject to the same federal tax rules as any other employee rewards or prizes. That is, unless a specific tax exemption applies to the incentive, the amount of the incentive (or its fair market value) is included in an employee’s gross income and it is subject to payroll taxes.
There is no specific tax exemption for wellness program incentives. The two main federal tax exemptions that apply to wellness incentives are the exclusions for medical care and employee fringe benefits. Cash and cash equivalents (for example, gift cards) are a common type of wellness incentive that are always taxable. Other wellness rewards, such as small gifts or reduced cost sharing under a group health plan, may be nontaxable.