Has your company been approached by one or more vendors claiming to offer a “wellness plan” or “indemnity plan” that will save you and your employees payroll taxes and increase employee take-home pay while reimbursing certain medical expenses? These plans, known as double-dip plans, promise large tax savings without significant employer cost but frequently do not meet IRS tax code requirements and put both employers and employees at risk. Such products have been repeatedly characterized by the IRS as a tax avoidance scheme but continue to be marketed to employers.
As a general rule, under Sections 105 and 106 of the Internal Revenue Code, employee contributions toward the cost of employee health plan premiums are not taxable to employees for federal income tax purposes and can be excluded by both employees and employers for employment tax purposes (such as FICA and FUTA). However, a key tenet of this principle is that employers and employees can only enjoy this tax benefit or exclusion one time.
Compliance Issues
Double dipping refers to a health or wellness plan under which the employee pays for the premium on a pre-tax or tax-exempt basis, but payment of the premium is followed by an allegedly tax-free “reimbursement” payment back to the employee (generally in approximately the amount of the premium) by the plan. This design results in a “double” tax benefit; the premium is paid on a tax-free basis, and the payment back to the employee is excluded from income as a tax-free reimbursement, thus resulting in ”double-dipping” on tax benefits. While the specifics of a double-dip plan can vary, in general, these programs involve:
- An employee contribution or premium paid to the plan with pre-tax dollars through a cafeteria plan;
- A promise that the plan will return all or a large portion of the employee’s tax-free premium payment as a tax-free reimbursement that is not tied to actual and incurred employee medical expenses;
- Marketing claims that the plan structure allows both the employer and employee to avoid payroll taxes, resulting in an increase in employee take-home pay and a reduction in employer FICA cost;
- The plan may offer some limited telehealth services (usually some basic primary care), virtual mental health visits and/or preventive care, all of which are usually duplicative of benefits available under the employer’s major medical plan.
The IRS considers these plans impermissible double-dipping because:
- Tax exclusion is obtained twice (at premium payment and reimbursement to participants);
- The reimbursement to employees is not tied to actual incurred and un-reimbursed medical expenses;
- Under the IRS tax code, reimbursement of pre-tax expenses is taxable income; and
- These programs do not constitute legitimate insurance because there is not enough risk involved.
Double-dip wellness programs also create other risks. To the extent the program provides actual medical care, such programs are incompatible with a qualified high-deductible health plan because the medical care is available on a pre-deductible basis and therefore destroys HSA eligibility.
These double-dip benefit programs create significant risk for employers and employees. The IRS may review the program (or audit the employer) and determine that taxes were not properly paid. Both employer and employee would be liable for unpaid taxes, as well as interest. Employers can also be penalized for failing to properly withhold income and employment taxes. Despite vendor claims, these programs do not meet IRS rules.
