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July 10, 2019

Tax consequences of gym membership reimbursement

All Good Deeds Get Taxed…

In order to encourage employees to exercise, some employers and insurance carriers reimburse or subsidize employees for the cost of a gym membership. Cash or cash equivalent rewards (i.e., gift cards) are always taxable income to the employee. Employers frequently offer non-cash rewards to employees in the belief that such things as t-shirts, water bottles, Fitbits, and gym memberships are not taxable to the employee, but each type of reward needs to be evaluated to determine whether or not it can be provided on a tax free basis.

Unless, it’s of Little Value

Under the Internal Revenue Code (the “Code”), certain fringe benefits may qualify for tax free treatment if they are of little value and provided infrequently, making it hard to reasonably account for their cost.  These are known as de minimis fringe benefits and can include company-branded water bottles, towels, T-shirts, and gym bags.  By contrast, a gym membership reimbursement for multiple months will rarely qualify as a de minimis fringe benefit due to the dollar value, and the amounts are both known and easily accounted for.  The reimbursement will also be viewed as a cash or cash equivalent, which is always taxable income to the recipient.

Off-Site Versus On-Site Gyms

While exercise has obvious health benefits, the value for an “off-site” (or third party gym open to the public) gym membership generally cannot be provided as a tax-free medical benefit because it does not meet the Code’s exception for “medical care.”  Medical care is defined as amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting a structure or function of the body.  Expenses for items or services that provide only general health benefits are considered taxable, and the IRS feels that gym memberships rarely qualify as tax-free medical care.[1]   

The IRS makes a limited exception to the broad “general health” exclusion.  If an individual can prove that he or she was diagnosed with a specific illness, is using the gym as treatment, and has only incurred the gym membership fees because of the illness under the direction of his or her health care provider, the membership fees may be excluded from the individual’s taxable income.[2] This will almost certainly require a supporting physician’s statement.

Note: This limited exception will only apply to the employee who can demonstrate this and will not broadly apply to all employees receiving a reimbursement or subsidy.

Also, the IRS does make exceptions for “on-site” gyms and employer-owned athletic facilities. To qualify, the gym or facility needs to be:

  1. Located on property owned or leased by the employer;
  2. Staffed by employees or a third-party hired by the employer for its operation; and
  3. Closed to the public. 

The most common example would be an employer who has an on-site gym as an employee perk, along with a cafeteria, and other amenities. 

Does it Matter Who Pays?

No, it doesn’t matter.  Sometimes, insurance carriers contribute to the cost of participant gym memberships.  While the employer is not the one paying for the gym memberships, the employer most likely should be the one addressing the tax issues.  This is because, but for the employer sponsored medical plan in which the employee participates, the carrier wouldn’t be paying the incentive.  Since the reward is a cash or cash equivalent incentive, it’s taxable income.  It’s becoming more common for insurance carriers to address the tax consequences of this approach with employers.

How Do We Account for the Value of the Off-Site Gym Benefit?

Since the off-site gym membership reimbursement is considered a fringe benefit and is unlikely to fit within the medical care exception, the value of the reimbursement will be added as income to employee’s IRS Form W-2.  The employer will add the amount to Box 1, under Wages, Tips and Other Compensation, and might detail the amount in Box 15 or on a separate statement.[3]

Summing it up

Employers need to evaluate each incentive and benefit offered to employees and determine its tax status.  The reimbursement of off-site gym membership fees is generally taxable to employees and must be reported in Box 1 of Form W-2. 

[1] The IRS has addressed this on several occasions, most recently in IRS Memorandum 201622031 (April 14, 2016).

[2] IRS Memorandum 201622031 (April 14, 2016).

[3] The U.S. Department of Labor recently proposed rules that would exclude the value of gym memberships (even if offsite) from being considered as regular compensation for the purposes of determining overtime under the Fair Labor Standards Act.