Taxation of Gym Reimbursement Arrangements

Question:  What are the tax consequences of an employer’s gym and exercise equipment reimbursement arrangement as part of its broader wellness program?

 Short Answer: The general rule is that any employer payment/reimbursement for gym, health club, spa, exercise equipment, or other similar expenses that are intended for general fitness and health is standard taxable income to employees.

Gym Memberships and Similar Costs are Not a Medical Expense

Employer payment/reimbursement of an IRC §213(d) medical expense through a group health plan—including a wellness program integrated with a group health plan—is a nontaxable benefit for employees.  The best guide to §213(d) medical expenses is IRS Publication 502.

Gym membership costs are not a §213(d) medical expense.  Therefore, any employer payment for or reimbursement of a gym membership fee is standard taxable income to employees that is subject to withholding and all applicable payroll taxes.

The same rule generally applies to all similar forms of expenses such as health clubs, spas, weight-loss programs, exercise equipment, and subscription fees for exercise equipment.  All of these costs are considered for the improvement of general health, appearance, or sense of well-being—none of which qualify as a medical expense.

The §213(d) definition of a medical expense applied by the IRS requires that the costs be for the diagnosis, cure, mitigation, treatment, or prevention of disease.  In other words, medical care expenses must be primarily to alleviate or prevent a physical or mental disability or illness.  Medical expenses do not include costs that are merely beneficial to general health, such as vitamins, vacations, or vigorous exercise at the gym.

Limited Exception: Treatment for Specific Disease

The only situation where expenses related to a gym or health club would qualify is where the fees are incurred upon the advice of a medical practitioner to treat a specified medical condition such as obesity.

Even where incurred to treat a medical condition, IRS Publication 502 indicates that the actual gym membership fee is not a medical expense.  Only the separate fees charged at the gym for weight loss (e.g., personal trainer services) would potentially qualify upon providing a letter of medical necessity from a physician and a showing that such expenses would not have been incurred but for the needed treatment of the disease.

The same conditions (treatment for specific disease, letter of medical necessity) would apply to weight-loss programs, exercise equipment, fitness trackers, exercise programs, and other similar expenses that are generally considered to be for general health purposes.

Reimbursing “Wellness” Expenses

Many employers offer various forms of wellness programs that provide reimbursement for a wide array of expenses that are beneficial to employees’ health.

Reimbursement of a §213(d) health expense creates a group health plan (generally in the form of an integrated wellness program or HRA), which would trigger the full array of group health plan laws (ERISA, COBRA, HIPAA, ACA, HSA eligibility, etc.).  Therefore, employers should avoid providing reimbursement for any §213(d) medical expenses outside the health plan unless it is part a HRA or wellness program that is integrated with the health plan.

We have much more details on that issue available here: https://www.theabdteam.com/blog/employers-should-not-reimburse-medical-expenses-outside-of-the-plan/

Employers should carefully monitor the expenses eligible for reimbursement under a wellness program arrangement that is solely intended to be a taxable, non-group health plan benefit.  These arrangements need to exclude any §213(d) medical expenses to avoid application of the onerous group health plan requirements.  For example, expenses such as smoking cessation programs, mental health therapy, and chiropractic treatment are generally medical expenses that would need to be excluded.

Employers that offer both medical and non-medical expense reimbursement in a wellness program need to have an administrative process in place to clearly segregate the two types of benefits and apply the relevant requirements to each.

Proposed Changes to Current Law

Last year, the House passed the Restoring Access to Medication and Modernizing Health Savings Accounts Act of 2018.  The bill would have added up to $500 annually of “qualified sports and fitness expenses,” including gym membership fees, as §213(d) medical expenses ($1,000 for joint returns).  The bill never passed the Senate, but similar legislative proposals continue to surface regularly around this issue.

Regulations

IRC §213(d)(1)(A):

The term “medical care” means amounts paid—

(A)  for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,

Treas. Reg. §1.213-1(e)(1)(ii):

(ii) Amounts paid for operations or treatments affecting any portion of the body, including obstetrical expenses and expenses of therapy or X-ray treatments, are deemed to be for the purpose of affecting any structure or function of the body and are therefore paid for medical care. Amounts expended for illegal operations or treatments are not deductible. Deductions for expenditures for medical care allowable under section 213 will be confined strictly to expenses incurred primarily for the prevention or alleviation of a physical or mental defect or illness. Thus, payments for the following are payments for medical care: hospital services, nursing services (including nurse’s board where paid by the taxpayer), medical, laboratory, surgical, dental and other diagnostic and healing services, X-rays, medicine and drugs (as defined in subparagraph (2) of this paragraph, subject to the 1-percent limitation in paragraph (b) of this section), artificial teeth or limbs, and ambulance hire. However, an expenditure which is merely beneficial to the general health of an individual, such as an expenditure for a vacation, is not an expenditure for medical care.

IRS Publication 502:

https://www.irs.gov/pub/irs-pdf/p502.pdf

Weight-Loss Program

You can include in medical expenses amounts you pay to lose weight if it is a treatment for a specific disease diagnosed by a physician (such as obesity, hypertension, or heart disease). This includes fees you pay for membership in a weight reduction group as well as fees for attendance at periodic meetings. You can’t include membership dues in a gym, health club, or spa as medical expenses, but you can include separate fees charged there for weight loss activities.

You can’t include the cost of diet food or beverages in medical expenses because the diet food and beverages substitute for what is normally consumed to satisfy nutritional needs. You can include the cost of special food in medical expenses only if:

  1. The food doesn’t satisfy normal nutritional needs,
  2. The food alleviates or treats an illness, and
  3. The need for the food is substantiated by a physician.

The amount you can include in medical expenses is limited to the amount by which the cost of the special food exceeds the cost of a normal diet. See also Weight-Loss Program under What Expenses Aren’t Includible, later.

Weight-Loss Program

You can’t include in medical expenses the cost of a weight-loss program if the purpose of the weight loss is the improvement of appearance, general health, or sense of well-being. You can’t include amounts you pay to lose weight unless the weight loss is a treatment for a specific disease diagnosed by a physician (such as obesity, hypertension, or heart disease). If the weight-loss treatment isn’t for a specific disease diagnosed by a physician, you can’t include either the fees you pay for membership in a weight-reduction group or fees for attendance at periodic meetings. Also, you can’t include membership dues in a gym, health club, or spa.

You can’t include the cost of diet food or beverages in medical expenses because the diet food and beverages substitute for what is normally consumed to satisfy nutritional needs.

ABD Office Hours Webinar: Final Wellness Program Regulations

 

 

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship.  Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).

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