The IRS recently sat down with the American Bar Association and employers to confirm how the Taxman would rule in several common benefits scenarios. See if what IRS says matches what you do.
Hot Topic #1: Wellness programs
Of all the efforts to contain ever-climbing healthcare costs, wellness programs are one of the few to make any headway. Which is why many employers are embracing them. But could the way you set up the program create compliance issues? IRS tackled two common scenarios during the recent ABA sit-down:
Question 1: As an incentive to participate in its wellness program, a firm “pays” employees in points every time they take a biometric screening, walk a certain number of miles, etc. Points are then traded in for prizes like $25 gift cards and company logo T-shirts. Are these taxable to the employee?
IRS says: Yes … and no. The gift cards are considered taxable because there’s a clear monetary value to the reward, while the T-shirts would be exempt as a de minimis fringe benefit.
Question 2: This company’s health insurer runs a wellness plan the company takes part in. If an employee goes to the gym three times a week in a month, the insurer will pay $20 of that person’s monthly gym membership. Are the payments taxable income?
IRS says: Yes. The Taxman differed with the ABA on this one. Because the insurer appears to be acting as an agent for the employer, the company is responsible for tracking, withholding and reporting employment tax on these pre-tax payments. (It’s not unreasonable or administratively tough to do so.)
Hot Topic 2: Flex spending plans
Besides wellness, your peers are latching onto other plan types to help employees and themselves offset their health costs. IRS hit them, too:
Question 1: An employee’s doctor prescribes an over-the-counter pain reliever and a cold medication.
Can they be reimbursed under the company’s flexible spending account?
IRS says: Yes. Even though OTC meds were recently eliminated as FSA eligible, because they were prescribed by a physician, they are reimbursable.
Hot Topic 3: Hardship withdrawals
Unfortunately, there’s a phenomenon more employers are facing more and more frequently: employees who need to tap into their benefits for some fast cash. IRS tackled 401(k) hardship withdrawals:
Question 1: A cash-strapped employee charges medical expenses on a credit card, then requests a hardship withdrawal. Is that acceptable?
IRS says: Probably not. Since the employee paid by plastic, there’s a question of how much “immediate and heavy financial need” is involved.
Question 2: An employee participates in a 401(k) and a deferred comp plan. The deferred comp plan allows for emergency distributions. Can he take the 401(k) safe-harbor withdrawal first?
IRS says: No. The employee isn’t eligible until he’s taken all available distributions and loans from other plans.
Note: While questions were answered by an IRS official, the Service maintains they may not reflect the official IRS position. Though they certainly give you an idea how IRS leans.
