Treatment of Certain Voluntary Benefit Payments

Employee Benefits Dartboard

P. Bruce Wright , Saren Goldner , Eversheds Sutherland (US) LLP | July 12, 2023 |

Employee Benefits Dartboard

In Chief Counsel Advice ("CCA") 202323006, the Internal Revenue Service ("IRS") addressed the consequences of a particular welfare benefit plan and considered whether certain benefit payments to employees pursuant to the plan are includable in the gross income of the employee (whether the premium was funded by the employer or employee pursuant to a salary reduction plan, in each case effectively reducing the employee's taxable income).

Under the facts of the CCA,1 the employer pays for a comprehensive health plan which qualifies as accident and health insurance under IRC section 106 so that the employer contributions are not income to the covered employee. In addition, the employer provides all employees with the ability to join a "fixed-indemnity" health plan that would also qualify as an accident and health plan under IRC section 106. Employees pay a premium via a salary reduction through a cafeteria plan that qualifies as such under IRC section 125. These premiums ($1,200 per month) are solely the obligation of the employees and the benefit payments are solely the obligation of the insurer, i.e., the employer bears none of the premium cost (nor any portion of the benefit cost), but the employer does administer the benefit payments.

Under the fixed indemnity plan, the employee can receive payments for participating in certain "wellness activities" and is limited to one payment of $1,000 per month. So, for example, if the employee gets a vaccination covered by the employer-paid plan, the employee qualifies for and receives $1,000. The policy also provides a fixed benefit for each day the employee is hospitalized. 

The IRS concludes in the CCA that if a benefit payment is made under the indemnity plan without regard to whether the employee has an unreimbursed health insurance expense, the payment is included in the employee's gross income and because it is provided in connection with the employee's employment, it is treated as "wages" for federal income tax purposes and subject to FICA, FUTA, and federal income tax withholding.

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  1. It is important to note that CCAs are drafted by the IRS with respect to a particular taxpayer, typically without taxpayer input, and may, or may not, state the taxpayer's facts correctly.

P. Bruce Wright , Saren Goldner , Eversheds Sutherland (US) LLP | July 12, 2023