Workplace Wellness Programs and Federal Taxes: Are You Compliant? FEATURED FACULTY: Vicki M. Nielsen, Of Counsel, Ogletree Deakins 202-263-0176 Vicki.Nielsen@odnss.com Aimee E. Dreiss, Associate, Ogletree Deakins 312-558-1426 aimee.dreiss@ogletreedeakins.com
Vicki M. Nielsen, Of Counsel, Ogletree Deakins Ms. Nielsen is a member of the employee benefits and executive compensation group. She has worked extensively in the areas of executive compensation arrangements, equity compensation and benefits provided to employees and independent contractors outside of qualified retirement plans. She has experience with all issues relating to executive compensation arrangements, including Code 409A, performance-based compensation and Code 162(m), equity compensation, change in control agreements, golden parachute taxes and Code 280G; executive fringe benefits; executive compensation disclosure issues (Item 402 S- K); Sarbanes-Oxley and Dodd-Frank compliance and other related corporate governance requirements and proxy advisory firm policies. She also routinely advises clients regarding fringe benefit plans, severance plans, supplemental unemployment compensation benefit plans (SUB pay), worker classification, employment taxes and related reporting and withholding requirements, and tax minimization strategies. Aimee E. Dreiss, Associate, Ogletree Deakins Ms. Dreiss counsels clients regarding qualified retirement plans, health and welfare plans and executive compensation plans. She assists clients with voluntary IRS and DOL qualified plan correction programs, and applications for tax-qualification status. Ms. Dreiss advises employers on federal and state income tax and employment tax matters, and advises employers on Health Care Reform compliance and transition planning issues. She has experience representing clients on employee benefits issues in mergers and acquisitions, and counseling plan fiduciaries regarding ERISA fiduciary liability and benefit claim issues.
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Title Goes Here Taxation of Workplace Wellness Programs Aimee Dreiss Vicki M. Nielsen Overview-Roadmap General purposes of employer provided wellness plans and incentives Overview of types of wellness incentives Federal income tax treatment when wellness incentives are provided to an employee Federal income tax treatment when wellness incentives are provided to an employee s spouse or other dependent State income tax treatment of wellness incentives Federal withholding and reporting obligations Excise tax penalties Bonus: ERISA considerations 1
Focus of Today s Presentation Tax treatment of wellness program incentives Not all wellness programs provide incentives we re not addressing the structure or design of wellness program We re only addressing program designs already in compliance with other applicable laws* and which do provide incentives *mentioned later in our presentation General Purposes of Wellness Incentives To encourage participation in wellness programs and thereby: Promote health & healthy lifestyles Prevent and manage disease Reduce and contain costs to employer 2
Types of Wellness Incentives Medical cost savings or additional medical benefits provided to employee Reductions in monthly or annual health care premiums or contributions Example: $100 premium reduction per month Contributions or additional employer contributions to health care flexible spending, health reimbursement accounts, or health savings accounts Waiver of all or part of deductibles or coinsurance for wellnessrelated medical care Example: waiving a copayment for completing a physical exam Certain health seminars/coaching sessions/classes No-cost participation or reimbursements for health-related programs (e.g., smoking-cessation or weight-loss programs) Cash incentives and gift cards $100 cash reward for taking a health risk assessment Non-medical care cash reimbursements Types of Wellness Incentives (cont.) Other Incentives Paying all or part of the cost of health club or gym memberships and fitness classes On-site workout facilities Healthy snacks, water bottles, T-shirts, etc. Movie or sports event tickets Raffles and prizes Awarding large fitness equipment (e.g., treadmill or a bicycle) Awarding additional paid time off or permitting exercise during work time Discounts on the employer s goods or services Other non-specific health and wellness training and coaching 3
Federal Income Tax Treatment Wellness Incentives Taxable or Not Simple example: Two $10 payments: Attend the wellness fair and receive a $10 gift card Complete the HRA and receive $10 off your monthly health plan premium One is taxable, one is not... 4
Wellness Incentives Taxable or Not? Analyzed like all other health, welfare and fringe benefits General Rule of Thumb - benefits are taxable wages unless specifically excluded by a section of the IRC No specific provision under current tax law that excludes from income the incentives paid through wellness programs In most cases, wellness incentives need to qualify as an employer-provided health benefit or de minimis fringe benefit to be provided on a tax-free basis Incentive Provided to Employee Medical Incentive Medical cost savings or medical benefit provided as incentive include the following: Reduction in health care premiums or contribution amounts Employer FSA, HSA or HRA contribution Waiver of all or part of deductibles or coinsurance for wellness-related medical care Targeted health seminars/coaching/classes No-cost participation or reimbursements for health-related programs Generally provided tax free to employee under Code Section 105 and/or 106 5
Incentive Provided to Employee Medical Incentive (cont.) Amounts paid by employers or received by employees for medical care under an employer-provided health plan are excluded from employee s gross income under Code sections 105 and 106 Medical care generally means amounts paid for either the: (i) diagnosis, cure, mitigation, treatment or prevention of disease or (ii) purpose of affecting any structure or function of the body For self-insured plans, wellness incentives, just like other medical benefits, must be provided on a nondiscriminatory basis under Code Section 105(h) Incentive Provided to Employee Cash Cash or cash equivalent like gift cards General rule: always taxable Regardless of amount - never de minimis It is never administratively impracticable to account for cash or cash equivalents A cash equivalent fringe benefit (such as a fringe benefit provided to an employee through the use of a gift certificate or charge or credit card) is generally not excludable under Section 132(a) even if the same property or service acquired (if provided in kind) would be excludable as a de minimis fringe benefit. Treas. Reg. 1.132-6(c) 6
Incentive Provided to Employee - De Minimis Fringe Benefit Excluded under Code Section 132(e) Any property or service provided to an employee that has so little value that accounting for it would be unreasonable or administratively impractical The value of the benefit must be small when considered within the context of: the frequency with which the benefit and similar benefit are provided, and the level of administrative practicability and costs associated with accounting for the benefits Non-discrimination rules generally do not apply De Minimis Fringe Benefit Frequency: How often is too often? Does tracking the frequency defeat the argument that the benefits are de minimis? 7
De Minimis Fringe Benefit Value - How much is too much? No specific dollar limitation Examples in the regulations and in the 1984 legislative history are not limited to items with particular dollar limits Occasional typing of personal letters by a company secretary Occasional use of company copier Occasional cocktail parties, group meals or picnics for employees and their guests Traditional birthday or holiday gifts of property with a low fair market value Occasional tickets to sports events or shows Coffee, doughnuts or soft drinks Local telephone calls Flowers, fruit, books, or similar property provided to employees under special circumstances Incentive Provided to Employee - Gym Memberships E.g., Employer reimburses employees for gym memberships or pays membership fees directly Typically a personal expense Not likely covered by health benefit exclusion Gym memberships do not generally constitute medical care under Code section 213 Unless the gym membership is prescribed by a doctor to treat a specific disease No other exclusion Taxable Note: On-site athletic facilities may not be taxable 8
Incentive Provided to Employee - On-Site Athletic Facilities Excluded under Code section 132(j)(4) Located on premises of the employer Not necessarily business premises Operated and owned/leased by employer Co-ownership or co-leasing permitted Substantially all of the use is by Current or retired employees, terminated due to disability Spouse, dependent children, widow(er)s, orphaned children Others are taxed (e.g., independent contractors) Nondiscrimination rules do not apply Incentive Provided to Employee - Qualified Employee Discounts Excluded under Code section 132(c) Any discount with respect to qualified property or services of the employer to the extent the discount does not exceed certain specified limits Services discount cannot exceed 20% Qualified property discount is limited to price offered to customers x employer s gross profit % Employee Current or retired employee, terminated due to disability Spouse, dependent child, widow(er) or orphaned children Single line-of-business Nondiscrimination rules apply 9
Incentive Provided to Employee - Free Time Awards of additional paid time-off Allow employees to exercise or attend health classes during work hours Any wages (i.e., cash) paid with respect to additional free time continue to be taxable to the employee and subject to payroll taxes Federal Income Tax Treatment Incentives Provided to Dependents & Others 10
Incentives Provided to Dependents & Others General Rule: A benefit may be taxable to an employee even if the benefit is received by or for another (spouse and/or child) Incentives Provided to Dependents (cont.) Medical Wellness Incentives General rule: if the incentives can be provided to the employee tax free, the incentives can also be provided to the employee s covered spouse and dependents on a taxfree basis to the employee Example: additional monthly premium reduction when spouse completes health risk assessment Exceptions: Where the incentives is provided to a non- Federal tax dependent, such as a domestic partner Impact of United States v. Windsor, No. 12-307 (U.S. June 26, 2013) 11
Incentives Provided to Dependents & Others (cont.) Cash and Other Incentives No difference. A taxable fringe benefit is income to the employee even when the benefits are provided to someone other than the employee. If a fringe benefit is furnished to someone other than the employee, the benefit is considered furnished to the employee and use by the other person is considered use by the employee. Thus: If taxable to employee when provided to employee, taxable to employee when provided to dependent or other State Income Tax Treatment of Wellness Incentives Since most state income tax codes are coupled with the Federal tax code, generally the Federal income treatment and the state income tax treatment will be the same Exceptions Incentives provided to a domestic partner, civil union partner, or same-gender spouse in certain states In some states, contributions to HRAs and cafeteria plans are subject to state income tax (e.g., N.J.) Others 12
Federal Withholding and Reporting Tax Withholding and Reporting General Rule: Employers are considered the provider of benefits even if a third party provides the actual benefits Informal guidance from the IRS 13
Tax Withholding Most taxable benefits are added to the payroll for taxation and reported as imputed income Income recognized but not received through payroll Imputed income is added to the gross for purposes of determining tax withholdings Imputed income causes employee to have A smaller paycheck Higher taxes Tax Reporting Form W-2 Taxable amount (Boxes 1, 3 and 5) Amounts withheld (Boxes 2, 4 and 6) Information reporting (Box 12, Code DD) Under the Affordable Care Act, employers are required to report the cost of employer-sponsored health coverage Under Notice 2012-9, coverage under a wellness program is included in the cost of coverage to the extent the program is a group health plan However, if an employer does not charge a COBRA premium for continuation coverage under the wellness program (or the employer is not subject to COBRA), the cost of coverage is not required to be reported. 14
Failing to Treat Taxable Benefits as Wages: Tax Consequences The employee is liable for individual income taxes on the value of the benefit The employer is potentially directly liable for the taxes it did not withhold, and there may be additional penalties Failing to Treat Taxable Benefits as Wages: Risks to Employer Employer is directly liable for employee s taxes that should have been withheld, but were not: Federal income taxes: 25%/35% FICA taxes: SS taxes of 6.2% on first $113,700 and Medicare taxes of 1.45% uncapped (2013 rates) Employer share of FICA taxes IRS assert employer liability for IRC 6656 late deposit penalty on its share of FICA taxes (i.e., 10% of FICA taxes it should have paid) Information reporting penalties under IRC 6721/6722 Generally, $100 per incorrect W-2 up to annual maximum of $1.5M; risk of mirror penalty 20% negligence penalty could also apply under IRC 6662 Interest 15
Failing to Treat Taxable Benefits as Wages: Risks to Employer Example: Employer has 5,000 employees. Employer provides a $100 gift card to each employee that completes a health risk assessment (1000 employees in total), 50% of whom have wages in excess of the $113,700 social security wage base for 2013 and 50% of whom have wages significantly below the wage base. Employer does not report the amount as income. Failing to Treat Taxable Benefits as Wages: Risks to Employer Example (cont d): Employer is liable for the employees taxes as follows (total of $29,450): Employee federal income taxes: 1000 employees x $100 x 35% = $25,000 Employee FICA: 500 employees x $100 x 7.45% = $ 3,725 500 employees x $100 x 1.45% = $ 725 Total FICA: $ 4,450 16
Failing to Treat Taxable Benefits as Wages: Risks to Employer Example (cont d): Employer FICA: $4,450 6656 late deposit penalty on employer share of FICA taxes only: $445 i.e., 10% of FICA taxes employer should have paid Information reporting penalties under 6721/6722: $100,000 $200,000 if mirror penalty applied 6662 negligence penalty: $6,780 i.e., 20% of the total underpayment (Total = $33,900) Interest Recap Analysis: Identify the wellness incentives that are provided Employer or third-party Check to see if there are any statutory provisions that exclude the reward from the employee s income Value any portion of the benefit that is not excludable for inclusion in the employee s gross income 17
Best Practices Document fringe benefit analysis and decision If a fringe benefit is taxable to the employee Report taxable amount on Form W-2 Withhold employment taxes Communicate tax consequences to employees at the outset What Other Laws Apply? COBRA HIPAA (nondiscrimination and privacy rules) GINA ERISA PPACA (Health Care Reform) ADA Title VII and Other Federal Laws State Laws 18
Excise Tax Considerations COBRA Applies to wellness programs that are group health plans, including onsite physicals, flu shots, disease management programs, health coaching Continuation of coverage upon qualifying event Obligations include initial notice, election opportunity, and termination notice Violations of COBRA trigger an excise tax liability under Code Section 4980B equal to: the total number of noncompliance days multiplied by the number of affected qualified beneficiaries (capped at 2) multiplied by $100. In general, the number of noncompliance days is the number days between the date the failure first occurred and the date the failure is corrected by the employer. An employer must self-report any failure to offer COBRA continuation coverage and send the required COBRA notice on IRS Form 8928, and file and pay the applicable 4980B excise tax Exceptions Capped for unintentional failures for a single employer plan is the lesser of 10% of the amount paid during the preceding tax year by the employer for group health plans, or $500,000 Excise Tax Considerations HIPAA Similar excise taxes also apply if the HIPAA wellness regulations are violated Under the final wellness regulations, effective for plan years beginning on or after January 1, 2014 Apply to participatory wellness programs and outcome-based or health-contingent wellness programs Provisions relating to rewards Essentially, every participating individual must have an opportunity to receive full reward, regardless of health status Increased Reward/Penalty Amount: As provided by PPACA, wellness programs can provide rewards or impose penalties of up to 30% of total cost of plan coverage, and, for programs designed to reduce or prevent tobacco usage, up to 50% of total cost of plan coverage If reward is greater than maximum, employer is subject to excise taxes under Code Section 4980D(a) of $100/day for each individual for whom the failure relates, for which self-reporting is required on Form 8928 19
Excise Tax Considerations GINA The Genetic Information Nondiscrimination Act of 2008 ( GINA ) which generally prohibits health plans and insurers from discriminating based on genetic information A wellness plan that is a group health plan cannot link any premium discount to a health risk assessment that asks for family medical history May provide inducements for completing HRA, but only if available to employees who don t answer family medical history questions For wellness plans that violate this prohibition, same IRC $100/day/participant excise tax penalty and self-reporting obligation applies to violations ERISA Considerations ERISA applies to wellness programs that are employee welfare benefit plans Plan document Follow plan terms SPDs and SMMs provided to participants Form 5500s filed annually (some exceptions) Claims procedure established and followed If also a group health plan Additional requirements under DOL claims procedure regulations Additional SPD disclosures Special timing rules for SMMs Consequences/Penalties 20
QUESTIONS? Contact Information Aimee E. Dreiss Associate, Employee Benefits Chicago, IL Email: aimee.dreiss@ogletreedeakins.com Phone: 312-558-1426 Vicki M. Nielsen Of Counsel, Employee Benefits Washington, D.C. Email: vicki.nielsen@ogletreedeakins.com Phone: 202-263-0176 21