On December 12, 2016, the IRS released a memorandum clarifying the tax treatment of benefits paid by Fixed-Indemnity Health Plans.
We’ll first define a fixed-indemnity health plan by stating that these plans typically pay a set dollar amount for certain health-related occurrences such as emergency room visits and inpatient hospital stays. Generally, these plans pay without regard to the amount of medical expenses incurred by the employee.
Here are a few examples of a fixed-indemnity health plan included in the IRS memo:
Situations 1, 2 & 3 in Tax Memo 20170313: A fixed indemnity health plan that pays employees $100 for each medical office visit, and $200 for each day in the hospital, without regard to the amount of medical expenses actually incurred by the employee or the amount that is paid or reimbursed by other insurance.
Situation 4 in Tax Memo 20170313: 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, without regard to the amount of medical expenses otherwise incurred by the employee.
Clarification of Tax Treatment of Fixed-Indemnity Health Plans
The IRS memo confirms that if premiums for this type of plan are paid either by the employer or pre-tax by the employee (through a Section 125 plan), the benefits received must be included in the employee’s gross income. However, if the employee pays 100 percent of the premium with post-tax payroll deductions, benefits received from these policies are not taxable.
In recent months, we’ve seen certain vendors market wellness programs that ultimately lead to the employee paying for a supplemental policy with pre-tax dollars. Be wary of these types of programs, as the memo confirms that the amount of reward or incentive given must be included in the employee’s income. Therefore, the IRS memo emphasizes that taxation cannot be avoided by disguising fixed indemnity payments as wellness rewards.
Employers should work with their advisor and tax professional to review any fixed-indemnity health plans or wellness programs offered to employees to ensure proper tax treatment of these plans.