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New Tax Impact: Payments from Fixed Indemnity or Wellness Plans

New Tax Impact: Payments from Fixed Indemnity or Wellness Plans

On January 20, 2017, the Office of Chief Counsel of the Internal Revenue Service released a memorandum: Tax Treatment of Benefits Paid by Fixed-Indemnity Health Plans. The memorandum also discusses wellness plans. Brokers who have advised clients on sponsoring such plans should be aware of the IRS’ new interpretation of the tax impacts of payments under these plans. We encourage brokers who advise clients on these plans to read the memorandum and we suggest that any employer with such plans discuss the implications of the memorandum with their tax advisor.

Fixed indemnity plans (sold by companies such as Aflac, Colonial Life, and others) have become popular group offerings as a means of filling the gap created by medical plans with high deductibles. They offer to pay the policyholder if a certain event occurs, such as a specific illness, an injury or a hospitalization.

Wellness plans too have gained popularity with employers as a method for encouraging employees to improve their health and to identify serious health issues at an early stage. These plans will often pay employees if they get a biometric screening, complete a health questionnaire or undertake certain activities to address chronic conditions.

What The IRS is Saying About Payments from Fixed Indemnity or Wellness Plans
In the memorandum, the IRS says that if an employee receives a payment from the plan and the employee paid the plan’s premium through a pre-tax deduction (via a section 125 cafeteria plan for example), then the payment from the plan is taxable. Likewise, if the employer paid the premium and did not include that premium amount in the employee’s gross income, then payment from the plan is taxable.

On the other hand, if premium is paid for by the employee with “post-tax” money or if paid by the employer, it is included in the employee’s gross income, then the IRS says that payment from a fixed indemnity or wellness plan is not taxable.

How This May Impact Employers
If the IRS strictly interprets and enforces the concepts in this memorandum, an employer, as the plan sponsor, could be responsible for determining how much an employee was paid from these plans and then be required to include such payments in the employee’s gross income. This would be very complicated. For example, how is an employer to know when and how much an employee received from a fixed indemnity plan payout? For this reason, we suggest that brokers advise employer-clients (with such plans) to discuss the IRS memorandum with the employer’s tax advisor and discuss the need to potentially alter the method by which premiums are paid for fixed indemnity and wellness plans.

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