The IRS published IRS Chief Counsel Memorandum 202323006 (the “2023 Memo”) on June 9, 2023. The 2023 Memo is the latest in a line of IRS guidance addressing 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, which we refer to as wellness conversion plans. This Alert addresses three common forms of wellness conversion plans, how they purport to work, issues jeopardizing their tax-free status, and recently proposed regulations that will codify certain IRS guidance on this topic. It does not address other potential non-tax-related compliance considerations.
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.
