IRS Continues Crackdown on Pre-Tax Benefits for Workplace Healthcare Premiums
As the healthcare debate gets ready to heat up once again, the IRS has shut down any form or arrangement that would allow employees to pay pre-tax benefits such as healthcare premiums. These are sometimes marketed to employers as a legal way to avoid employment taxes or to reimburse workers for most if not all of their paid premiums.
The IRS has made it clear through the issuance of three Chief Counsel Advice documents (â€śCCAsâ€ť) regarding these arrangements. A May 2016 CCA essentially reiterated the IRSâ€™s long-standing position that (1) cash rewards under a wellness program are taxable wages to the employee, and (2) reimbursements of premiums for participating in a wellness program are taxable wages to the employee if the premiums were originally made by pre-tax salary reduction through a cafeteria plan.
A more specific instruction surrounding these benefits came on January 2017 from the CCA. In it, the CCA stated that payments received by an employee under an employer-provided fixed indemnity health plan, such as those that are part of an employer sponsored wellness program, for example, are to be considered taxable wages to an employee under the following conditions: (1) If the employer paid the premiums and the value of the coverage was excluded from the employeeâ€™s wages, or (2) if the employee had paid such premiums themselves on a pre-tax basis.
Industry experts believe that it was probably the intention of the CCA to shut down abuses surrounding some employer wellness programs. This ruling is contrary to the Internal Revenue Serviceâ€™s previous positon where only amounts received in excess of a workerâ€™s unreimbursed medical expenses were to be considered taxable. Â The CCA further that these amounts are to be considered as taxable wages and thus are required to be reported on the W-2 form rather than on a Form 1099.
In May of this year, the CCA concluded that benefits which are paid as part of an employer-provided self-funded health plan is to be considered as taxable wages paid to the employee if amounts received by the employees for participating in health-related activities exceed the after-tax contributions that are made by the employees. Â This will likely most often be the case for most workers.
All of this news is not likely to be well received by employers who are struggling with healthcare costs as much as their workers will be in the coming months.
What this means for companies and PEO organizations is that any failure to treat these amounts as taxable wages can subject them to substantial reporting and withholding penalties from the federal government. The penalty for failure to furnish and file a correct W-2 can be as high as $530 for every employee that is affected.
If a company has a wellness plan it could be viewed as a group health plan and could be subject to HIPAA rules if it is considered to be qualified as ERISA benefits. Further ACA market reform requirements may also potential hold penalties of up to $36,500 for each plan participant for each year. This would most likely apply to the client or common law employer rather than the PEO – though itâ€™s not certain this would be the case.
Benefits and compensation is an area of employment that has gotten more complex in recent years. A PEO company can help you navigate through some of the most recent requirements from the government regarding these and many other issue.
NetPEOâ€™s network of companies can help your organization make the most of your human resource talent. We offer a full range of HR and employment services including employee leasing services, HR outsourcing, training and benefits management. To see how we can help you and your company, contact us today and get guaranteed results.