No one doubts the laudable goals of wellness programs. But while questions still swirl about the true effectiveness of wellness programs and their ultimate return on investment, spending on corporate wellness incentives shows no sign of slowing down. Employers plan to spend an average of $594 per employee on wellness-based incentives this year, up 15% from the average of $521 reported in 2013, according to a National Business Group on Health and Fidelity Investments survey.
Still, wellness programs hold many legal and tax implications for employers, particularly in light of the Affordable Care Act, which allows greater latitude in the amount of financial incentives employers can offer employees and family members who participate in certain types of wellness programs.
Garrett Fenton, a member at law firm Miller & Chevalier, says wellness programs are one of the most complex areas he works in, partly because they touch so many different aspects of employment law.
There are income tax and employment tax issues that arise whenever you have any sort of incentive that youre offering to an employee. There are potential Americans with Disabilities Act issues, potential age discrimination issues that can come up, he says. It seems like a simple area of law, he adds, but it really is something where no good deed goes unpunished, because there are so many potential foot faults for employers when theyre trying to offer these wellness programs.
Final regulations implementing the ACAs nondiscrimination rules for wellness programs became effective in January, but Fenton says many employers and consultants are still unclear about how the regulations have changed. The changes are subtle, but noncompliance can carry heavy penalties. Fenton outlines the issues he sees most frequently with employer-sponsored wellness programs, whats different under the new rules and what employers should watch out for.
Whats the issue you see most often?
The biggest issues that we see on a day-to-day basis deal with the nondiscrimination rules and excise taxes that can apply for violating those rules, and the income and employment tax issues with things like gift cards, for example. Thats always a big one, since there are a lot of income tax and employment tax issues that arise in connection with gift cards and similar types of incentives that are basically cash or similar to cash, like gift cards.
An employer has a wellness program and, for example, they say: if you go get your annual physical and attend a wellness seminar, well give you a $50 gift card. If you get that $50 gift card as an employee, generally speaking, thats going to be considered taxable income and wages to you that you receive from your employer.
Not only is it taxable to you as an employee, but also the employer has got withholding, federal income tax withholding, and reporting obligations. Its going to have to go on the W-2.
Whats new with wellness programs under the ACA?
The general rule is that a group health plan cant discriminate against participants and beneficiaries based on their health status. That rule has been around since the Health Insurance Portability and Accountablity Act was enacted in 1996. There have just been some modifications under the ACA. Thats where I think a lot of employers get tripped up, because there are a lot of consultants out there that tend to, frankly, get it wrong. There are a lot of things that werent changed in the new regulations but there were some things that are somewhat subtle and may fly under the radar that can actually be a big deal.
What do employers need to watch out for?
Theres always been this structure of [two types of] wellness programs under these rules participatory wellness programs and health-contingent wellness programs.
The health-contingent wellness programs are really where most of the issues are. Those are the programs where youre saying, you can get an incentive but you have to satisfy some sort of health standard first.
For example, a tobacco surcharge. You have to not smoke in order to get the reward of paying the lower premium. Or, if you keep your cholesterol below a certain amount or your blood pressure below a certain level, you pay a lower premium or you get some sort of reward. Thats where a lot of the nondiscrimination issues really are.
That general frameworks been in place since  but now, that category of health-contingent programs has been sub-divided into two more categories. This is entirely new. There are different requirements that apply to the different sub-categories. So you have what are called activity-only health-contingent wellness programs, and then you have outcome-based health-contingent wellness programs.
Those are two entirely new concepts and the rules are going to differ for them. Thats one area where theres a lot of confusion which rules now apply to activity-only wellness programs and which apply to outcome-based wellness programs, and how do you determine when a particular program falls into one of those categories [and] which one it falls into.
Is the guidance clear on the differences between the two programs?
Its relatively clear in the sense that we know what the general rules are for what constitutes an activity-only versus an outcome-based program.
An activity-only program is basically any wellness program where you have to do something related to your health to get the reward, but the outcome doesnt matter. For example, if youre the employer, [and you] offer a cash bonus or a gift card for employees who walk five miles a week. You actually have to do something and its related to health; thats an activity-only program.
An outcome-based program is one where you actually have to achieve some sort of result. Tobacco surcharge is a perfect example where an employer says, if you dont use tobacco, you pay $75 a month for your health insurance. If you do use tobacco, you pay $100 a month. The outcome matters. The result that you dont smoke is what matters, as opposed to just saying, if you go through a tobacco cessation course, youll pay the lower premium. You have to actually not smoke.
Those are the basic concepts. But there are all sorts of different types of wellness programs out there. Theres a pretty wide variety of structures, so some of them are unique and cutting-edge and it may be difficult sometimes to figure out where that line is and whether or not youre on the activity-only versus the outcome-based side. There can be some real distinctions there.
What are some of those distinctions?
The biggest difference really is with the whole requirement around reasonable alternative standards. This is also an area where theres a lot of confusion from how the regulations have changed from what they used to say. Before the ACA, the nondiscrimination regulations said that under any health-contingent wellness program, the employer had to offer a reasonable alternative standard for anybody who could prove that it was unreasonably difficult or medically inadvisable for them to actually follow through with the program.
That is still the rule is for activity-only wellness programs. but for outcome-based programs, like the tobacco surcharge, for example, you have to give a reasonable alternative standard to everybody. If I have a tobacco surcharge, and Im going to charge $25 a month more to someone who uses tobacco, I have to give everybody who uses tobacco regardless of whether or not its unreasonably difficult or medically inadvisable to stop smoking some sort of alternative that they can meet instead of quitting smoking to pay the lower premium.
What are the penalties for failure to comply with these new rules?
This excise tax provision has actually been around since 1996, back since HIPAA was enacted and those initial nondiscriminatin rules came out. Its basically an excise tax of up to $100 per day per affected individual, and there are some caps on it too. There are situations where it can be less, [or] some situations where the employer may be able to argue that they owe nothing, even if theres been a violation, if its corrected in a certain amount of time.
Its a fairly hefty excise tax, especially when youre dealing with a large employer. If you take $100 per day per employee, that can get up there pretty quickly. It also has to be self-reported and paid by the employer. Its not like the IRS is going to come knocking on your door and assess it, like the pay-or-play penalty, for example, where the IRS is going to affirmatively come after the employer, initially, to collect. Its something that has to be self-reported by the employer, and a lot of employers dont even know about that.
Its amazing how many times I speak to groups of employers and many of them have never even heard of this. Ill mention the form that it needs to go on, the Form 8928, and even pretty sophisticated in-house tax personnel have never heard of that form and have not been filing it. Its something that has flown a little bit under the radar, but its been around for a while.
So employers should file that Form 8928, even if they dont owe any money?
We say to file that form, even if there isnt a failure [to comply with wellness plan rules], even if you havent screwed anything up, even if you dont owe any money. Still file that form and just put zero owed. File it every year. Because at least that will start the statute of limitations running. The IRS generally wont be able to come in more than three years later and assess any back taxes. Once the three-year statute of limitations is up, youre generally going to be in the clear unless there was any bad faith.
If you dont file that form then 20 years, 30 years, down the line the IRS could, in theory, come in and say, youve been screwing this up for 20 years or 30 years. You owe these excise taxes going all the way back for 20 years or 30 years.
When you file that Form 8928 [and] youre putting a zero, [youre] saying you dont owe anything [and that] there wasnt a violation of not just the wellness program rules, but of all those other market reform provisions under the ACA.
The thought and fear, I guess, is that the IRS, now that we have all these other provisions that are enforced by that same excise tax, and the IRS has supposedly been ramping up and getting ready to enforce all these provisions under the ACA, that there actually is going to be more active enforcement now.
What other advice do you have?
[Internal] tax people really need to be involved, at least to some extent, in structuring wellness programs and making sure that the programs are compliant. Typically, wellness programs are not designed by tax people. Theyre designed by HR or legal completely different departments particularly at larger employers. The tax people may not even know whats going on with a particular wellness program, and they really need to be involved. They need to be filing the Form 8928.
Wellness programs have laudable goals and people dont really think anything of them, but its [a case of] no good deed goes unpunished. I think making sure that all these rules are being complied with is the main takeaway for employers.
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