February 15, 2017

Tax Treatment of Benefits Paid by Fixed Indemnity Health Plans (article)

For the second time in six months, the IRS Chief Counsel has addressed the taxation of certain benefits.  In the Chief Counsel’s pronouncement dated April 14, 2016, the IRS reviewed the taxation of wellness program rewards (see Taxability of Wellness Program Rewards, Benefit Beat, 6/7/2016).  The IRS concluded that any cash reward, incentive or other benefit that would not otherwise qualify as a deductible IRC Section 213(d) medical expense, such as a gift card or gym membership fees, are taxable and includible in the employee’s compensation, subject to federal income tax withholding, as well as FICA and FUTA taxes. Only certain de minimis gifts such as a t-shirt or water bottle can be provided without imposing taxes.


The IRS Chief Counsel Memo dated December 12, 2016 addresses the tax treatment of benefits paid by fixed-indemnity health plans.  A fixed indemnity health plan is one that pays covered individuals a specified amount of cash for the occurrence of certain health-related events, such as office visits or days in the hospital.  Because this type of plan does not generally reimburse medical services, the IRS concluded that if the employer pays for indemnity coverage, or allows payment of the coverage by salary reduction through the terms of a Section 125 cafeteria plan, the benefit paid is taxable.  If the employee pays the premium on an after-tax basis, the benefit can be tax-favored. 


Further, the IRS addressed a scenario whereby a wellness plan pays employees a fixed indemnity cash payment benefit of $100 for completing a health risk assessment, $100 for participating in certain prescribed health screenings, and $100 for participating in other prescribed preventive care activities.  The IRS determined that because the premiums for the wellness plan are paid with amounts that are not included in the employee’s gross income and wages, the tax exclusion would not apply to the fixed indemnity cash benefit payments; and thus, the payments would be included in the employee’s gross income and wages.


The information contained in this article is provided as general guidance and may be affected by changes in law or regulation. This article is not intended to replace or substitute for accounting or other professional advice. Please consult a CBIZ professional. This information is provided as-is with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.   

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