IRS Releases Chief Counsel Memo on Tax Treatment of Fixed Indemnity Health Plan Benefits

On Jan. 20, 2017, the Office of Chief Counsel for the IRS released a memorandum regarding the tax treatment of benefits paid by fixed-indemnity plans. As background, fixed-indemnity health plans typically pay a set dollar amount for certain health-related occurrences such as office visits, days in the hospital, and certain diagnoses (such as cancer or other specific illnesses). However, the set dollar amounts paid are generally considered disconnected from permissible IRC Section 213(d) medical expenses incurred by the employee, so taxation of these fixed benefits has always been the subject of controversy.

This memo confirms that if premiums for a fixed-indemnity plan are paid either by the employer or pre-tax by the employee through a cafeteria plan, the benefits received must be included in the employee’s gross income. Conversely, if premiums are paid entirely by the employee with after-tax dollars, payments from the indemnity plan would be tax free.

In addition, the memo addresses wellness programs paid for with pre-tax salary reductions that offer a specific reward or incentive for certain activities that are not considered medical care under 213(d). Under these types of programs, the memo confirms the amount of the reward or incentive must also be included in the employee’s income.

Therefore, employers should work with their advisor and tax professional to review any fixed-indemnity health plans or wellness programs offered to employees to ensure proper tax treatment of fixed-indemnity benefits (especially employer-paid plans or those paid with pre-tax salary reductions).

IRS Office of Chief Counsel Memo »