What expense category is Wellness Program Costs?

In today's competitive job market, many businesses offer wellness programs to support their employees' health and well-being. These programs, which can include everything from gym membership reimbursements to health screening services, are a valuable fringe benefit that can improve morale and productivity.

For employers, the costs associated with sponsoring a wellness program are a deductible business expense. However, to ensure deductibility and favorable tax treatment for employees, these programs must be structured correctly. This guide will explain how to categorize these costs according to IRS rules and how to track them for full compliance.

Wellness Program Costs Category

The costs an employer pays for a wellness program are an ordinary and necessary business expense, categorized as an Employee Benefit Program.

IRS Publication 535 allows for the deduction of employer contributions to welfare benefit funds and accident and health plans. A wellness program is considered a fringe benefit that falls under this umbrella, making its costs deductible for the employer.

Important Considerations When Classifying Wellness Program Costs

To ensure the costs are deductible and the benefits are tax-free to your employees, the program should be structured as a formal benefit plan.

Wellness Programs as a Fringe Benefit

An employer-sponsored wellness program is a fringe benefit—a form of non-cash pay for the performance of services. The cost of providing these benefits is generally deductible by the employer. In most cases, if the program is part of a qualified accident and health plan, its value can be excluded from the employee's gross income, making it a tax-free benefit for them.

Formal Plan Requirement

For the benefits to be tax-free to employees, the wellness program should be part of a formal, written plan. This plan must not discriminate in favor of highly compensated employees or owners and should be communicated to all eligible employees.

Distinction from Employee Medical Expenses

It is important to distinguish between an employer-sponsored wellness program and an employee's personal medical expenses. The employer deducts the cost of providing the program. This is different from an individual deducting their own medical expenses on their personal tax return.

Tax Implications and Recordkeeping

Proper reporting and documentation are essential for deducting wellness program costs.

How to Report the Deduction

For a sole proprietor filing a Schedule C (Form 1040), contributions to a wellness program are deducted under Part II, Line 14, Employee benefit programs (other than Pension and profit-sharing plans).

What Records to Keep

You must maintain records to substantiate the costs of your wellness program. These records should include:

• The written plan document for the wellness program.
• Invoices from any third-party wellness vendors or service providers.
• Proof of payment for all program costs, such as canceled checks or credit card statements.
• Records showing which employees are eligible for and participating in the program.

How Fyle Can Automate Tracking for Wellness Program Costs

Fyle helps you manage and document all expenses related to your employee wellness program, from vendor payments to employee reimbursements.

• Centralize Vendor Invoices: Have your wellness providers email invoices so that they can be sent directly to Fyle for automatic and accurate data capture.
• Track Employee Reimbursements: Employees can easily submit receipts for qualifying wellness expenses (like gym memberships) for reimbursement.
• Create a Clear Audit Trail: Fyle keeps plan documents, vendor invoices, and proofs of payment together in one digital record.
• Automate Your Accounting: Sync categorized wellness program costs directly to your "Employee Benefits" account in QuickBooks, Xero, NetSuite, or Sage Intacct.