When Are Wellness Reimbursements Taxable?

Employee wellness programs are a common benefit designed to promote a healthy lifestyle among staff. These programs often reimburse employees for expenses ranging from gym memberships and fitness trackers to nutrition apps. A point of confusion for both companies and workers is whether these financial benefits are considered taxable income, as the answer depends on the nature of the expense being reimbursed.

The General Rule of Taxability

The Internal Revenue Service (IRS) considers most wellness reimbursements to be taxable income because they are a form of compensation. Unless a specific tax exemption applies, any financial benefit an employer provides is treated like wages. This means the fair market value of the reimbursement is added to an employee’s gross income and is subject to the same payroll taxes as their regular salary.

This rule applies to many common wellness benefits, which are considered additional compensation. Examples of taxable reimbursements include:

• Gym or health club memberships used for general fitness
• Money provided to purchase a fitness tracker or pay for marathon entry fees
• Subscriptions to a general nutrition app
• Cash rewards or gift cards for participating in a wellness activity

The core logic is that if the benefit is for an expense that is merely beneficial to an individual’s general health, it does not qualify for a tax exclusion. Employers are required to treat these reimbursements as wages, withholding appropriate taxes and reporting the amounts to the government.

Exceptions for Nontaxable Medical Care

An exception to the general rule exists for reimbursements that qualify as “medical care” under federal tax law. For a wellness benefit to be nontaxable, it must be for an expense paid for the diagnosis, cure, mitigation, treatment, or prevention of a specific disease. This definition does not include expenses that are simply for maintaining general health.

To illustrate the difference, consider a gym membership. If an employee receives a reimbursement for a gym membership to improve their overall fitness, that reimbursement is taxable income. However, if a doctor prescribes a weight-loss program to treat a specific, diagnosed medical condition like obesity, the reimbursement for that program can be nontaxable. While the fee for the weight-loss program itself can be a tax-free medical expense, the cost of special foods recommended as part of the diet is not.

Reimbursement for a smoking cessation program is nontaxable because it treats nicotine addiction. Similarly, nutritional supplements can qualify, but only if a doctor recommends them as a treatment for a specific, diagnosed medical condition. In contrast, reimbursement for a stress-reduction yoga class for general well-being would be taxable.

Structuring a Nontaxable Wellness Program

For an employer to offer nontaxable wellness benefits, the reimbursements must be administered through a formal, employer-sponsored health plan. These benefits cannot be provided as a standalone arrangement and are often integrated into plans like a Health Reimbursement Arrangement (HRA).

An HRA is an employer-funded account that reimburses employees for out-of-pocket medical expenses. When a wellness benefit is part of an HRA, it becomes subject to the plan’s rules, which align with IRS requirements for medical expense reimbursements. The plan must be governed by a formal plan document that outlines the rules for eligibility and reimbursement.

A requirement of such a plan is the process of substantiation. The plan administrator must have procedures to verify that each expense submitted for reimbursement is a legitimate medical expense. This often involves requiring employees to submit a doctor’s note or a letter of medical necessity that connects the expense to the treatment of a diagnosed condition.

Without this formal plan and substantiation process, any reimbursement an employer provides risks being classified as taxable income. The structure of the plan is what allows the employer to legally exclude the benefit from the employee’s wages.

Tax Reporting for Employees

When a wellness reimbursement is taxable, it impacts an employee’s net pay and tax filings. The employer is required to include the value of the reimbursement in the employee’s gross income, where it is treated just like regular salary or wages.

This additional income will be reflected on the employee’s annual Form W-2, Wage and Tax Statement. The taxable reimbursement amount increases the total wages reported in Box 1 (Wages, tips, other compensation), Box 3 (Social Security wages), and Box 5 (Medicare wages and tips).

Because the reimbursement is considered wages, it is subject to all standard payroll taxes. The employer must withhold federal and any applicable state income taxes from the payment. The amount is also subject to Social Security and Medicare taxes, collectively known as FICA taxes, which reduces the net amount the employee receives and increases their total tax liability.