Last week, the Internal Revenue Service (IRS) released a chief counsel advice (CCA) memorandum from December 2016 that provides insight regarding how the IRS will view the tax-treatment of cash payments from employer-sponsored fixed indemnity health plans and certain employer-sponsored wellness program rewards.  This information is important for employers who offer fixed indemnity health coverage to employees to review, so that they know how benefit payments should be considered when reporting employee income.  Few employer-sponsored wellness programs offer payments in the manner described by the memo, but employers who offer wellness programs still may want to review the guidance to ensure they are compliant.

The memo specifies that if payments are made by a fixed indemnity health plan when a medical event occurs generally (such as a hospital admission) and not based on the actual amount of medical expenses incurred, then the payments are taxable as income to individuals unless the employee paid for the premiums with after-tax dollars.  If the premiums for the coverage were paid for by salary reduction contributions under a cafeteria plan or directly by the employer, then payments from the policy must be considered taxable income. The memo also concludes that similar payments that may be made to employees for participation in a wellness program must be treated as taxable income too.  Wellness program rewards and incentives may only be exempted from income tax purposes if they pay for, or can only be used to reimburse for, qualifying medical care.  So, for example, a health insurance premium discount or an HRA contribution awarded to an employee for wellness program participation would fall under the employer-provided health insurance income tax exclusion, since the reward could only be used to reimburse medical care.  However, cash payment made simply for program participation or for completing program activities (such as a $100 bonus for completing a health risk assessment) should be considered taxable income.

While a CCA memo is not the same as a regulation and, therefore, is not considered law, these memos are prepared by the IRS Office of Chief Counsel and then issued to field or service center employees of the IRS to provide advice and/or instructions regarding how to enforce existing law.  Therefore, they are an indicator as to how the IRS will act in the future with regard to fixed indemnity plan payments and wellness program rewards that are paid out like fixed indemnity health plan benefits.

By Jessica Waltman, Special Contributor

Jessica Waltman is a health reform strategist, with more than 20 years of experience in health insurance markets and health policy. She is the former Senior Vice President, Government Affairs, for the National Association of Health Underwriters.