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  • IRS Memorandum Sheds Light on Taxability Of Benefits Paid by Self-Funded Health Plans

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IRS Memorandum Sheds Light on Taxability Of Benefits Paid by Self-Funded Health Plans

July 13, 2017 Robert Sheen Health Care Coverage, IRS
IRS Memorandum Sheds Light on Taxability Of Benefits Paid by Self-Funded Health Plans

Many employers which provide self-funded healthcare for their employees have taken to covering the cost of employee participation in associated wellness plans. It’s a practice the IRS is well aware of. The IRS sheds light on how that money should be handled in tax filings. In a memorandum dated April 24, 2017, which expressly noted that it may not be cited as precedent, the IRS Chief Counsel offers his view to answer the question:

Is a benefit paid under an employer-provided self-funded health plan included in income and wages if the average amounts received by the employees for participating in a health-related activity predictably exceed the after-tax contributions by the employees?

The IRS Chief Counsel says, yes, the amounts should be included in income and wages for either or both of the following two reasons:

The self-funded health plan provided by the employer does not involve insurance risk. According to the IRS, that means it is not considered insurance for federal income tax purposes (including section 104(a)(3)).

The ratio of the average amounts received by the employees for participating in wellness programs to the after-tax contributions by the employees shows that the amounts received by the employees are attributable employer contributions (and not employee after-tax contributions) so that the exclusion under section 104(a)(3) does not apply.

This memo may offer guidance for employers who purchase self-funded health plans, also known as fixed indemnity health plans, and associated wellness plans from sellers, such as product developers or insurance brokers. The IRS Chief Counsel stated that the sellers promote the plans “as a way to provide certain benefits to employees at no or little cost to the employer and no or little cost to the employees on a net of withholding take-home pay basis.”

To view the IRS Chief Counsel memorandum in its entirety, click here.

To learn more about ACA compliance in 2021, click here.


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Summary
IRS Memorandum Sheds Light on Taxability Of Benefits Paid by Self-Funded Health Plans
Article Name
IRS Memorandum Sheds Light on Taxability Of Benefits Paid by Self-Funded Health Plans
Description
Many employers provide funding for employees to participate in wellness programs that are part of self-funded health plans. The IRS views those incentives is potentially subject to tax. Find out how in this quick update.
Author
Robert Sheen
Publisher Name
The ACA Times
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The ACA Times
Short URL of this page: https://acatimes.com/qcc
Robert Sheen

Robert Sheen

Robert Sheen, Esq., is editor-in-chief of The ACA Times. He also is founder, president and CEO of Trusaic.

Robert Sheen is Founder and President of Trusaic, Inc. Robert is a graduate of the University of Southern California, in Business Administration with an emphasis in International Finance. He earned his Juris Doctor from Loyola Law School, Los Angeles, concentrating in Tax Law.

View more by Robert Sheen

Related tags to article

Fixed Indemnity Health PlansHealth Care CoverageIRSIRS Chief CounselSelf-Funded Health PlansTax Filings
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