The IRS Office of Chief Counsel recently issued Chief Counsel Advice (CCA) 202323006, which relates to the tax treatment of an employer-funded, insured, fixed-indemnity wellness policy. Although CCAs are not usable or citable as precedent, they provide insight into IRS policy and guidance for employers and wellness plan sponsors, particularly for audits.
The policy the Chief Counsel addressed in the memo provided certain “tax-free” wellness indemnity payments to employees who made $1,200 monthly premium payments through cafeteria plan salary reductions. In exchange for participating in certain health and wellness activities, the employees would receive a maximum of one $1,000 monthly payment through the employer’s payroll system. Employees also received other benefits, such as free wellness and nutritional counseling and a benefit for each day of hospitalization due to illness or injury. Employees were responsible for the costs of participating in the health and wellness activities, although many were provided at no cost or covered by other insurance.
The CCA finds that the wellness indemnity payments under the policy are included as an employee’s gross income if that employee had no unreimbursed medical expenses related to the payments. Likewise, the payments are subject to FICA, FUTA, and federal income tax withholding.
Under Internal Revenue Code §105(b), income exclusion is available only for payments to reimburse expenses for medical care, not for payments made regardless of whether the employee has medical care expenses. This policy allows for monthly wellness indemnity payments, even if the employee incurred no out-of-pocket costs in participating in health and wellness activities. Therefore, the monthly wellness indemnity payments are not properly excluded from gross income under §105(b).
Furthermore, under §104(a)(3), gross income does not include payments that an individual receives from accident or health insurance policies for injuries or illness. However, this income exclusion is inapplicable if the payments received are paid by the employer or paid via employer contributions, not includible in the employee’s gross income, such as through cafeteria plan deductions.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.
Hall Benefits Law, LLC
Latest posts by Hall Benefits Law, LLC (see all)
- Fifth Circuit Considers Arbitration Clause in ERISA Claim - March 20, 2026
