In recent years, many “wellness plan” vendors have offered plans claiming to save significant taxes for both the employer and its employees. These plans typically consist of wellness-based indemnity plans provided via a Section 125 Cafeteria Plan. The wellness plan benefits are limited but readily attainable.

However, the Internal Revenue Service (“IRS”) has scrutinized many indemnity-based wellness plans for several reasons. One of the key compliance concerns relates to alleged “double-dipping” to avoid taxation.

While the IRS Tax Memorandums address valid concerns, they are not legal precedent and only apply to certain limited plan arrangements. 

Do the IRS Tax Memorandums discussing “double dipping” and related issues apply to the CHAMP Plan?

No. There are 2017 and 2023 IRS Tax Memorandums that scrutinize certain wellness indemnity plans that initially appear similar to the CHAMP Plan. The issues addressed in these IRS Tax Memorandums do not apply to the CHAMP Plan, for the reasons discussed below.

IRS Memorandum 201703013 addresses two issues: (1) whether payments received by an employee… (contact us for the entire article) 

IRS Memorandum 201703013 concludes that: (1) an employer may not exclude from an employee’s gross income payments under an employer-provided fixed indemnity health plan if the value of the coverage was excluded from the employee’s gross income and wages; and (2) an employer… (contact us for the entire article) 

Situation 1. An employer provides all employees, regardless of enrollment in other comprehensive health coverage, with the ability to enroll in coverage under a fixed indemnity health plan that would qualify as an accident and health plan under § 106 of the Code. Employees pay premiums for the plan by…  (contact us for the entire article) 

IRS Memorandum 201719025 addresses whether a benefit paid under an employer-provided self-funded health plan should be included in an employee’s income… (contact us for the entire article) 

IRS Memorandum 201719025 concludes that the employer-provided self-funded health plan does not involve insurance risk, and accordingly, is not insurance… (contact us for the entire article) 

The CHAMP Plan operates as set forth above. Thus, the amounts received by the employees are attributable to contributions by the employer (and not employee after-tax contributions) so that the exclusion under Section 104(a)(3) does not apply. In short… (contact us for the entire article) 

IRS Memorandum 202323006 addresses whether wellness indemnity payments under an employer-funded, fixed indemnity insurance policy…

…The facts in IRS Memorandum 202323006 state that an employer provides comprehensive health coverage for its employees through a group health insurance policy. Such health coverage provides preventive care benefits, such as reimbursements for the cost of flu shots and other vaccinations, without any cost sharing for covered individuals… 

Use of preventive care, such as vaccinations, under a comprehensive health plan in which an employee is enrolled, qualifies the employee for the payment for the month. The fixed-indemnity health insurance policy provides wellness counseling, nutrition counseling, and telehealth benefits at no additional cost. The employee is responsible for any costs associated with receiving any health-related activity, although in many cases all or part of the cost of the health-related activity will be provided at no cost or is covered by other insurance. (contact us for the entire article) 

IRS Memorandum 202323006 concludes that wellness indemnity payments under an employer-funded, fixed-indemnity insurance policy… …Importantly, the IRS conclusion only applies to wellness indemnity payments under an employer-funded, fixed-indemnity insurance policy…

The wellness indemnity payments under the Health Population Management component of the CHAMP Plan are not made under an employer-funded, fixed-indemnity insurance policy. Accordingly, the scrutiny by the IRS in Memorandum 202323006 is inapplicable to the CHAMP Plan. (contact us for the entire article) 

How can I distinguish a wellness plan scheme from a genuine employer-sponsored healthcare plan?

Make sure you have trusted ERISA counsel to help advise. This is not a black and white benefits world.

Certain supplemental employer-sponsored healthcare plans can offer a significant advantage for employers, especially self-funded employers, not all supplemental plans comply with applicable law.

That’s why it’s essential to perform due diligence and ensure that the supplemental plan you use to benefit you and your employees fully complies with all applicable laws.