Irs Draws a Bead on Fixed Indemnity Plans
Publications
11/16/2017
IRS To Tax Certain Payments From Fixed Indemnity Health Plans
According to the IRS, payments fabricated to participants under certain fixed indemnity insurance policies must be included in the employees' gross wages, unless the premiums are paid on an after-tax basis. Stock-still indemnity wellness plans are plans that pay covered individuals a specified amount of cash for the occurrence of certain health-related events such as infirmary visits or the diagnosis of a detail condition or disease (e.grand., cancer). The do good amounts paid to participants in the plan are non related to the amount of medical expenses actually incurred by the employee.
Earlier this year, the IRS released a Principal Council Communication Memorandum, CCA 201703013. The IRS concluded that "an employer may not exclude from an employee's gross income payments under an employer-provided stock-still indemnity health plan if the value of the coverage was excluded from the employee's gross income and wages" or "if the premiums for the fixed indemnity health plan were originally fabricated by salary reduction through a Section 125 cafeteria programme." If the premiums are paid with after-tax dollars, the program benefit payments are excluded from the employee'due south gross income. Employer payments and employee premiums paid under a deli plan towards fixed indemnity health plan coverage are not included in the employee's compensation income at the time the amounts were paid since they are made through bacon reduction under a cafeteria program. Therefore, according to this memorandum, benefit payments associated with that coverage constitute taxable income.
The problem with stock-still indemnity health plans for the IRS is the fact that cash payments are made to employees without regard to the actual corporeality of expenses incurred by the employee for medical care. Section 106(a) of the Internal Acquirement Lawmaking (the "Code") excludes from income premiums for accident or health insurance coverage that are paid by an employer. Section 105(b) of the Code allows employees to exclude amounts received through employer-provided accident or health insurance, if those payments are made as reimbursement for medical care related to personal injuries or sickness. Notwithstanding, the IRS reasons that since amounts received nether employer-sponsored fixed indemnity health plans exercise not take into account the actual medical costs incurred, the reimbursements are not reimbursements for personal injury or sickness, and therefore must be included in gross income.
The IRS guidance also specifically discusses cafeteria plans. The IRS notes that under Department 125 of the Code, the employee has the option to receive cash instead of a bacon reduction applied to buy accident or wellness coverage. If the employee elects a pre-taxation bacon reduction for accident coverage instead of greenbacks, that corporeality is excluded from gross income as employer-provided accident or health coverage under Section 106. Withal, if the employee elects a salary reduction for premiums toward a fixed indemnity health program, the amounts payable as benefits to the employee under the plan volition be includible in gross income since the greenbacks reimbursement amount is provided to the employee without regard to the amount of medical expenses otherwise incurred.
In light of this guidance, employers offering fixed indemnity plans should carefully evaluate how premiums for that coverage is paid and the impact of that decision on hereafter benefit payments. According to the IRS, when employees pay premiums for a stock-still indemnity health plan through a pre-tax bacon reduction nether a Section 125 cafeteria program, benefit payments nether the policy will exist treated as taxable income. If you lot are uncertain about the taxation implications of your fixed indemnity benefits or have questions about this IRS guidance, please contact a fellow member of the McGrath N employee benefits practice group.
Source: https://www.mcgrathnorth.com/employee-benefits-point-of-law/irs-to-tax-certain-payments-from-fixed-indemnity-health-plans
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