The IRS Office of Chief Counsel recently published a memo regarding the tax treatment of an employer-funded insured fixed indemnity wellness policy. This guidance was issued in response to an internal request for guidance regarding a particular employer's benefit offerings.
Specifically, the memo addresses whether wellness payments under an employer-funded, fixed indemnity insurance policy (including where the premium for the coverage is paid by employee salary reduction through a §125 cafeteria plan) are includible in the gross income of the employee if the employee has no unreimbursed medical expenses related to the payment. Additionally, the memo discusses whether wellness indemnity benefits included in the employee's gross income are subject to employment taxes.
In this case, the employer offered employees fully insured major medical coverage, which provided coverage of preventive services without cost-sharing. Additionally, the employer offered employees the option to enroll in coverage under a fixed indemnity health insurance policy that was intended to supplement the employee's other coverage by providing wellness benefits. Employees who elected the fixed-indemnity coverage paid the monthly $1,200 premiums by salary reduction through a §125 cafeteria plan.
The fixed indemnity health insurance policy provided several types of benefits, including a payment of $1,000 per month if the employee participated in certain health or wellness activities (e.g., use of preventive care, such as vaccination). The policy also provided wellness counseling, nutrition counseling and telehealth benefits at no additional cost. Additionally, the policy provided a benefit for each day that the employee was hospitalized. The wellness benefits were paid by the insurer to the employer, which then paid the benefits via their payroll system to employees.
Upon analysis, the memo concludes that the wellness payments under such a fixed indemnity insurance policy funded by employee salary reductions are includible in the employee's gross income if the employee has no unreimbursed medical expenses related to the payments (either because the activity that triggers the payments does not cost the employee anything or because the cost of the activity is reimbursed by other coverage). The guidance explains that the § 105(b) tax exclusion for medical expenses is limited to amounts paid solely to reimburse expenses incurred for medical care and does not apply to amounts that the employee would be entitled to receive regardless of whether expenses for medical care are incurred. Additionally, the memo confirms that because the wellness payments are not for medical expenses, the payments are treated as wages for employment tax purposes.
The memo applies only to the specific case and cannot be cited as a precedent. However, employers may find the memo helpful in understanding how the IRS interprets the tax laws as applied to this type of wellness benefit. For specific tax advice, employers should always consult with their tax or legal advisor.