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The Wagner Law Group

The Wagner Law Group is a nationally recognized practice in the areas of ERISA and employee benefits, estate planning, employment, labor and human resources and  investment management.

 

 

Established in 1996, The Wagner Law Group is dedicated to the highest standards of integrity, excellence and thought leadership and is considered to be amongst the nation's premier ERISA and employee benefits law firms. The firm has six offices across the country, providing unparalleled legal advice to its clients, including large, small and nonprofit corporations as well as individuals and government entities worldwide. The Wagner Law Group's 27 attorneys, senior benefits consultant and three paralegals combine many years of experience in their fields of practice with a variety of backgrounds. Seven of the attorneys are AV-rated by Martindale-Hubbell and six are Fellows of the American College of Employee Benefits Counsel, an invitation-only organization of nationally recognized employee benefits lawyers.  Seven of the firm's attorneys have been named to the prestigious Super Lawyers list for 2016, which highlights outstanding lawyers based on a rigorous selection process.

 

 

 

Contact Info

The Wagner Law Group

 

  Integrity | Excellence

  

Boston 

Tel: (617) 357-5200 

Fax: (617) 357-5250 

99 Summer Street 

13th Floor

Boston, MA 02110

 

Washington, D.C.

Tel: (202) 969-2800

  Fax: (202) 969-2568

800 Connecticut Ave., N.W.

Suite 810

Washington, D.C. 20006

 


Palm Beach Gardens 

Tel: (561) 293-3590
Fax: (561) 293-3591
7108 Fairway Drive
Suite 125
Palm Beach Gardens, FL 33418

   

Tampa

Tel: (813) 603-2959

Fax: (813) 603-2961

101 East Kennedy Boulevard

Suite 2140
Tampa, FL  33602 

 

San Francisco

Tel: (415) 625-0002

Fax: (415) 358-8300

300 Montgomery Street

Suite 600

San Francisco, CA 94104

 

St. Louis

Tel: (314) 236-0065

Fax: (314) 236-5743
25 W. Moody Avenue
St. Louis, MO  63119

 

 

www.wagnerlawgroup.com

 

 

 

May 18, 2017

 

 Health and Welfare Law Alert

 

 

 

 

 IRS Guidance on Tax Treatment of Benefits Paid by Self-Funded Fixed-Indemnity Plans

 

 

 

The IRS has issued a Chief Counsel Advice addressing whether a benefit paid from an employer's self-funded, fixed-indemnity health plan is taxable when the average amount received by employees for participating in health-related activities, including rewards for participating in so-called "wellness programs", exceeds the employees' after-tax contributions. 

 

 

Background.  A fixed-indemnity health plan pays covered individuals a specified amount of cash with the occurrence of certain health-related events.  Insurance promoters are marketing certain fixed-indemnity health plans intended to reduce an employer's FICA obligation, at little or no cost, by significantly increasing employees' pre-tax salary reductions.  These plans operate as follows:

 

  • Employees make pre-tax contributions and relatively small after-tax contributions to the program.  A large portion of the pre-tax contributions are returned to the employees as cash payments from the program, either as overpayments of the employee's actual medical expenses or as rewards for participating in what the promoter calls "wellness programs." 

 

  • The pre-tax contributions to the program decrease the employer's and employees' FICA taxes, and the cash payments are treated as not includible in income.  This results in the employees' net take-home pay generally remaining unchanged.

 

  • The employer pays a fee to the promoter for administering the plans, the amount of which is less than the FICA tax that would have been paid had the employer not adopted the program.

 

Law.  In general, the Internal Revenue Code provides that gross income of an employee does not include amounts received through accident or health insurance. However, in order for this exclusion to apply, the arrangement must meet the definition of "insurance."  The Supreme Court has explained that in order for an arrangement to constitute insurance for federal tax purposes, both risk shifting and risk distribution must be involved.  This would include self-funded plans that have the same effect as insurance.

 

 

 

EXAMPLE:  A fixed-indemnity plan has premiums paid on a pre-tax basis through a cafeteria plan.  A covered individual's expenses for a doctor's office visit are $30.  However, the plan pays $200 per office visit.  The excess amount of $170 is included in the individual's income.

 

 

 

Analysis.   The IRS concludes that because these plans do not involve a risk of economic loss as a result of overpayments or rewards for wellness plan participation, this is not insurance for federal tax purposes.  Therefore, since the plans are neither insurance nor have the effect of insurance, amounts received by employees are not excluded from the employees' income and are subject to FICA payments from both the employer and employees.

 

 

 

The Memorandum is available at:  https://www.irs.gov/pub/irs-wd/201719025.pdf

 

 

 

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This Newsletter is provided for information purposes by The Wagner Law Group to clients and others who may be interested in the subject matter, and may not be relied upon as specific legal advice.  This material is not to be construed as legal advice or legal opinions on specific facts. Under the Rules of the Supreme Judicial Court of Massachusetts, this material may be considered advertising.