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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