Along with our usually informative content, please pay close attention to the article on indemnity plans with a wellness benefit/payment indemnity plans promoting an increase in take-home pay for employees and reduced tax burdens for employers.

These plans may be “too good to be true.” Our internal legal team and our partners at Maynard Nexsen conclude that some versions of these products are not permitted under current IRS Code. Essentially, these arrangements don’t meet the definition of a “health plan” and they “double dip” on payroll deductions and benefit payments to achieve purported tax benefits. We urge you to avoid these programs as they present financial and tax risks for both employers and employees.

Indemnity Plans

What are they?

At their core, indemnity plans¹ provide fixed, cash payments upon the occurrence of a health-related event & exist outside the Affordable Care Act’s (ACA) regulations. In recent years, arrangements claiming to provide tax benefits via a monthly “wellness payment/benefit” have sprouted. These “plans” have prompted questions & analyses of whether such arrangements are “too good to be true” or whether they run afoul of tax law. Review indemnity policy types & other plans below; read on for assistance in analyzing market products.

¹Hospital indemnity or other fixed indemnity insurance provides fixed, cash payments upon the occurrence of a health-related event. Benefits are paid regardless of the amount of expenses a consumer incurs. Fixed indemnity insurance has traditionally been used as a form of income replacement, and it is not a substitute for comprehensive coverage. Source: Short-Term, Limited-Duration Insurance Fact Sheet July 2023 CMS

Tax Treatment of Certain Benefit Payments in Fixed Amounts Received Under Employer-Provided Accident & Health Plans²

The Treasury Department & IRS proposed amendments in July 2023 proposed rules to clarify that:

• payments from employer-provided fixed indemnity health insurance plans (and other similar plans) are not excluded from a taxpayer’s income if the amounts are paid without regard to the actual amount of any incurred medical expenses; and
• the taxpayer must meet substantiation requirements for reimbursements for qualified medical expenses from any employer-provided accident & health plan to be excluded from the taxpayer’s gross income.

The Treasury Department & the IRS are not finalizing proposed amendments at this time to study issues & concerns raised.

²March 28, 2024, CMS Factsheet re: Final Rule

Per Maynard Nexsen³ Law Firm & TRUE Network Partner

• “The core problem with each iteration of the product (i.e., certain fixed indemnity health plans with a wellness benefit) is that nothing we have seen will allow ‘double-dipping’ with tax benefits. The IRS has clearly indicated that if premiums are paid on a tax-free basis, then the benefits are taxable.”
• “There is an important exception that these products attempt to use: that benefits will be excluded from gross income to the extent they are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred for the prescribed medical care.” See IRS Ruling in References.
• The problem in these various products is that the individual receives a benefit whether he has incurred an unreimbursed medical expense.
• “For example, in one product, the medical expense that triggered the benefit was the completion of a health risk assessment. Unless the employee paid out-of-pocket to complete the health risk assessment (they did not), this benefit is fully taxable. See Maynard Opinion in References.
• “We are not out to shut down programs that can benefit clients. We have put much time into evaluating these products in the hope that it could deliver the benefits it promises. Unfortunately, the law simply does not allow it to do so; and, we think, puts the individual taxpayer at risk, in addition to the employer, the broker, and the vendor.”
• “Other than the narrow exception discussed above—the law works to prevent tax free benefits when the plan is paid for on a pre-tax basis (i.e., the law works to prevent double-dipping).“
• “As a result, these products only benefit employees who would already have unreimbursed out-of-pocket medical expenses that exceed the value of the benefit they provide. It is unclear if it would even benefit them since those unreimbursed, out-of-pocket medical expenses are not what actually triggers the payment.”

³Employee Benefits & Executive Compensation (maynardnexsen.com); See Maynard Opinion in References.

What’s the Law?

IRS Code: Sections 105 & 213