Health Quarterly: Wellness plans are tricky

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Nearly every company has a wellness plan or is contemplating one. And why not? The right plan can save money on insurance premiums, create healthier employees, reduce absenteeism and increase productivity.

Seems like a no-brainer, right? Not really.

That’s because wellness plans — depending on how they’re structured — can lead to sticky problems with both the IRS and federal law.

Federal tax law

The first thing employers need to realize: any benefit that results in the employee getting cash, is taxable, said Jan Steinhour, a tax attorney with Rothgerber, Johnson and Lyons.

‘For example, I just had a client offering a wellness program, and he was reimbursing employees for their gym club memberships,” she said. “Seems simple, right? It was straightforward, didn’t require much administration time. But, that reimbursement is taxable.”

Any cash reimbursement for any health-related items must be included on a W-2, she said.

But that’s not all. Any reimbursement for gym fees must also go into the calculation for 401K contributions.

“Employers have to be careful,” Steinhour said. “Any money given to an employee could increase those contributions. Employers could be trying to do the right thing — but there’s a direct tax effect, and a ripple effect.”

There are two kinds of employee wellness programs, and only one kind can get companies into deep water with the IRS or civil courts.

The first kind is the type in which companies merely encourage health lifestyles through brown bag presentations. The second is targeted more at people with health risks and takes a more active approach.

“Both are designed to reduce costs, and create more ‘presentee-ism,’” she said. “These programs are designed to help people be healthier, more productive.”

But there are implications beyond the tax aspect.

According to the New York Law Journal, employers have to be wary of running afoul of federal law — the Health Insurance Portability and Affordability Act (HIPPA), the Genetic Nondiscrimination Act and the American with Disabilities Act. Violating any one of those laws can leave a company with an unhealthy civil fine — and possible legal penalties, as well.


While most people associate HIPPA with protecting patients’ privacy, the law goes further than that.

HIPPA prevents group health plans from using health factors as a basis for discrimination with regard to either eligibility or premium contributions, said Jeffrey Klein in the New York Law Review.

Simply put, wellness programs cannot reward people based on health factors.

“For example, a reward based on participation in a program without regard to the health outcomes … would not violate HIPPA, if all similarly situated employees may participate in the program.”

Companies run into problems when they condition rewards based on something like successfully quitting smoking. Participating in smoking cessation programs have to be enough to earn the reward — even if the employee never stops smoking.

“It’s a discrimination issue,” Steinhour said. “And it’s more important now. Before the Affordable Care Act, these were regulations. The ACA codified them — so they’re law now.”

GNA compliance

Companies cannot gather health information about employees, Klein said.

Not only that, insurance companies cannot adjust the premium based on genetic information nor can they ask people or their families to undergo genetic tests.

“This law basically restricts the collection and use of genetic information by group health plans,” Klein said.

Basically, the law says genetic information can’t be gathered for the purposes of underwriting insurance plans. If a company holds wellness screenings, and asks for family history, that could be a violation, Klein said.

“These wellness screenings cannot be held prior to or in connection with an enrollment period,” he said.

Companies can make sure they stay on the right side of the law by simply not sharing results with insurance companies, and not asking for family medical history.

“If they do share the information, or gather it for their own purposes — that’s a violation of the law,” she said.

And even once a company clears the GNA hurdle — by not storing information on site, sharing it with an insurance company or firing an unhealthy employee — there are still other laws to comply with.

ADA compliance

Wellness plans can’t be designed so that they are mandatory, Steinhour said. That’s because an employee who isn’t able to accomplish a physical task could sue under the ADA.

“Mandatory wellness plans aren’t unlawful on their own,” she said. “But if you hold a smoking cessation class — there are going to be people who can’t stop smoking. And requiring them to quit, that’s going to be the problem.”

Companies that offer exercise classes could also run into the ADA problem, if the classes are mandatory.

“If a health factor on which a bona fide wellness program conditions a reward constitutes a disability as defined by the ADA, the program must comply with the ADA’s reasonable accommodation requirement and the employer must engage in an interactive process … to develop a reasonable alternative.”

Other issues

Small businesses, in particular, should be concerned about a law that prohibits companies from “incentivizing” employees away from the small group plan.

“You can’t offer them cash if they don’t sign up for health insurance,” she said. “It’s seen as encouraging them away from insurance, and that’s against the law.”

Companies can’t offer more pay to employees who opt out of health insurance, even if they are included on a spouse’s plan at another company.

“It’s a classic mistake,” she said. “But doing it violates small group rules.”

None of this means that wellness plans should be avoided, Steinhour said. But companies should craft them carefully.

“Wellness plans are a great tool to cut health care costs,” she said. “But they have to be looked at very carefully. Companies have to be very cautious when offering incentives.