The IRS issued its fourth Chief Counsel Advice 202323006 (the “CCA”) to address the tax treatment of payments made to employees through employer-funded fixed indemnity insurance policies. Specifically, the guidance speaks to how wellness indemnity payments should be treated in the event an employee has unreimbursed out-of-pocket medical expenses related to the payment. The CCA states that under a fixed indemnity health insurance policy, wellness indemnity payments should be included in the employee’s gross income subject to FUTA, FICA and federal income tax withholdings.
In the CCA, the IRS provides an example which includes, in part, the following facts: an employer’s fixed indemnity health insurance policy is a voluntary program intended to supplement its employees’ other health coverage through wellness benefits. The policy provides a payment once per month of $1,000 if an employee participates in certain wellness or health activities, which may include preventive care services such as vaccinations. Additionally, in the example, the policy also provides wellness counseling, nutrition counseling and telehealth services at no additional cost, as well as a benefit for each day an employee is hospitalized. Under the policy, the wellness benefits are paid from the carrier to the employer and then from the employer to the employee through the payroll system. The IRS reasons that an employee would not qualify for a tax exclusion when the employee did not have any unreimbursed medical expenses resulting from the activity leading to the payment and the employee was entitled to receive the wellness indemnity benefit regardless of whether the employee incurred any medical expenses either because the employee was reimbursed by other insurance coverage or the payment did not cost the employee anything. Therefore the payment would be subject to additional tax withholdings.
Despite the release of three previous memoranda and now the fourth, many employers continue to implement these types of policies as part of their overall benefits package for employees. While this guidance cannot be used or cited as precedent, employers need to be mindful of the potential tax implications if such a policy is currently in place as the release of multiple memoranda addressing this area evidences the IRS’s opinion on the topic. Employers offering a fixed indemnity insurance policy that includes a wellness component should review the set up of their plan and how they address the taxation of the benefit provided to determine next steps.
