A longtime campaign promising tax savings along with workplace wellness plans is seeing a comeback
But many of the plans promoted don’t qualify for legitimate tax benefits. They’re double-dipping tax avoidance strategies pitching payroll tax savings if employers offer the schemes to their employees
Unlike popular — and legal — employer-provided health plans that require proof of medical expenses to get a tax benefit, the tax avoidance offers only require employees to elect salary reductions and to complete actions like talking to a health coach or calling a toll-free number. Then they get most of the salary reduction back tax-free
“It’s got nothing to do with wellness,” said John Hickman, a partner at Alston & Bird. “It’s got nothing to do with health coverage. It’s kind of a misnomer if you call it wellness program, because what it really is, is a taxable wage reduction scheme.”
Though data is scarce, the IRS and tax professionals said they’re seeing the return of more promoters pitching the scheme to employers and in some cases adapting to avoid IRS scrutiny
Some tax professionals said promoters may be using the carcass of companies that marketed the pandemic-era tax credit. Others said new tech advancements made it easier to run the plans. The employee retention break was a legitimate refundable tax credit that fell victim to a boom of third-party companies creating aggressive marketing campaigns to con taxpayers into claiming relief they don’t qualify for
“We have seen a return of the double-dip scheme as a way to avoid employment taxes,” said Kevin Knopf, a senior technician reviewer in the IRS Office of Chief Counsel speaking at a May conference
Both the IRS and Department of Justice have touted success in going after tax shelter promoters. But the agencies saw an exodus of workers in the Trump administration’s first year and because the double-dipping wellness scheme impacts a smaller group of taxpayers, the IRS may not have the rers said
The IRS is always juggling multiple priorities, said Karen Field, senior director at RSM US
“This is a tough one,” Field said. “This has technical issues that they have to address. They haven’t really put out heavy duty guidance on this.”
Revival With a Rebrand
Legitimate wellness programs are a popular benefit among US companies. More than half of employers with 10 to 199 workers and 83% of larger companies offer a wellness program in at least one area around smoking cessation, weight management, and behavioral or lifestyle coaching, according to a survey last year from health policy group KFF
But many fall under the general <a href="https://todaytrendnews7.com/lock-your-wallet-how-to-protect-against-personal-attacks-in-the-digital-age-of-finance/” title=”Lock your wallet: How to protect against personal attacks in the digital age of finance”>personal health expenses category and not medical care expenses. Personal health expenses are generally not deductible or reimbursable
The illegitimate scheme promising tax savings for both the employee and the company is an example of decades-old arrangements the IRS has previously gone after. But companies are evolving in marketing by masking themselves as legitimate while also trying to separate from the programs the IRS has warned about
Knopf said some companies are rebranding as health management programs
This trend is making it more difficult for taxpayers to identify lawful tax benefits, lawyers and tax professionals said
Running Afoul
Participating in one of these schemes comes with potentially steep consequences
Employers could face penalties of up to 20% of the underpaid taxes as well as unpaid FICA taxes and other additional penalties if caught by the IRS. Employees typically would have to pay back taxes and interest, though could avoid the penalties if they act in good faith
Tax professionals said the employers targeted are smaller than in the past, but still high in employee count
“Volume is key here,” said Kenneth Dettman, founder and CEO of TaxNow, a tax management company. “They’re not making a ton of money off of each employee so in order for it to be worthwhile for the promoters they’re going after employers with typically at least a hundred, ideally thousands of employees.”
Promoters also shop them around to lawyers, looking for a legal endorsement
“There isn’t a consensus in the legal community,” said Barbara Zabawa, founder of compliance practice Wellness Law, LLC. “These plans can find a lawyer who will say, ‘Oh this is fine if you tweak this or do that.’ ”
The programs can be legal if the employee is actually spending taxable dollars on a medical expense, she added. But the majority seem to run afoul of IRS guidelines with no actual medical expense involved
IRS guidance is generally limited. The agency in 2002 released a revenue ruling rejecting the “double-dipping” strategy. The IRS’ Office of Chief Counsel also has tried to address its position on these types programs in a 2023 memo
Lawyers and tax professionals said they want more
“I don’t understand frankly, why the IRS can’t just plainly say you can’t reimburse employees tax-free if those employees did not spend their own out–of-pocket, after-tax dollars on the expense,” Zabawa said
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