How to Incentivize Employee Wellness Programs and Stay Tax-Compliant

Question: For several years now, our organization has sponsored a wellness program for employees. Unfortunately, we’ve never seen a high level of participation. A handful of employees seem to love it and take full advantage of its features. But a much larger percentage either barely participate or ignore it completely. At a recent leadership meeting, one of our HR managers suggested incentivizing employees to use the program. What might this look like and what are the tax implications?
Answer: Some employers do indeed offer incentives for participating in their wellness programs. For instance, an employee who completes a specified objective may be given 100 points that are worth $1 toward an item or gift card. There are other ways to drive participation, too. As your question notes, however, it’s important to know the tax impact before rolling out any incentive.
Important Points About Points
The tax consequences of the points strategy described above depend on the specific details of the benefit offered. Points are generally taxable, because the IRS treats the award as the equivalent of receiving a gift card or an item of comparable value when the points are redeemed.
As a result, under a points arrangement, employers are responsible for withholding income taxes and payroll taxes just as they must do for regular wages. But there’s a catch: The points aren’t subject to tax until they’re used or redeemed. So, no current tax is imposed for accumulating points under the program.
Other Ideas
Employers may offer other types of wellness program incentives. Some popular variations are:
Reimbursements for gym memberships. An employer may offer gym membership reimbursements as part of a wellness program. However, the reimbursements must be included in the taxable income of participating employees.
Flexible Spending Account (FSA) rewards. FSAs for health care expenses — commonly known as health FSAs — have become a popular benefit offering. These are employee-owned savings accounts that allow participants to set aside pretax dollars to pay for qualified medical expenses.
Employers may provide wellness rewards for depositing funds in a health care FSA. Such benefits generally aren’t taxable, but they’re subject to a contribution limit of $3,200 in 2024 (up from $3,050 in 2023).
De minimis incentives. Employers might provide small giveaways, such as T-shirts or coffee mugs, for participating in a wellness program. These items are typically tax-free.
Worth a Try
As a general rule, employers shouldn’t give up on their wellness programs too easily. By providing the right incentives, you may see an uptick in participation and, thereby, start enjoying more of the positive effects — fewer absences, greater productivity and higher morale. Then again, if your wellness program isn’t cost-effective, discontinuing it is certainly an option. Consult your CPA for help identifying all the costs involved as well as for assistance in developing metrics that will tell you whether the program is worth continuing.