Although “wellness conversion” plans are not new, vendors have been looking for creative ways to market those plans as employers look for cost-effective solutions to improve employee health and wellness plan offerings. The IRS has addressed what it views as the impermissible conversion of taxable wages to non-taxable income by misclassifying the wages as tax-free payments from an employer-sponsored health plan specifically designed for this purpose. This Alert addresses common forms of wellness conversion plans, how they purport to work, issues jeopardizing their tax-free status, proposed regulations that are a good indication of the IRS’s enforcement direction, and considerations and red flags for employers to consider.
This Alert is relevant for any employer sponsoring, or that is considering implementing, a wellness plan that allows employees to make significant pre-tax contributions toward the wellness plan coverage, most or all of which the plan returns as tax-free payments upon the completion of specified wellness activities.
