If it looks too good to be true…

You should know that there is a plethora of plans being pushed by promoters, all contending that their plans offer certain tax advantages and are PPACA compliant. Typically these programs tout having a legal opinion letter. Those legal opinion letters we have seen, however, deal with general points of tax law and lack specific attention to the details of the promoted program. Know that legal opinion letters are a worthless defense for an IRS attack. An IRS private letter ruling on a promoted program would be far more meaningful, yet none of these promoters seem to have secured such. Extreme care should be exercised to assure that any such program is fully vetted by your CPA and/or attorney before implementation. Case in point is recent IRS Chief Counsel Advice 201719025. Here are the particulars of the promoted plan and its purported tax benefits addressed in the CCA….

  • Employees who voluntarily participate make pre-tax contributions to the wellness plans and relatively small after-tax contributions to the self-funded health plans. A large portion of the pre-tax contributions are returned to the employees as cash payments from the self-funded health plans or rewards through the wellness plans—which are purportedly not includible in income.
  • The pre-tax contributions to the wellness plans lower the amount of Federal Insurance Contributions Act (FICA) taxes that are owed by the employees and the employers, and the cash payments that are made to the employees from the plans are treated as not includible in income or wages.
  • The employer pays a fee to the promoter for administering the plans, the amount of which is generally less than the FICA taxes that otherwise would have been paid, purportedly allowing the employer to provide a health plan and a wellness plan to its employees at no (or little) cost.

The IRS ruling was that the promoted tax benefits were not in fact valid. The ruling offers two examples….

. . . Situation 1. An employer provided all employees, regardless of enrollment in other comprehensive health coverage, the option to enroll in coverage under a self-funded health plan. Participants paid a small after-tax employee contribution and were paid a significantly larger fixed cash payment benefit for participating in certain health-related activities. The participants didn’t pay for the activity, and the cash benefit could be received for up to 12 activities per year. Under an actuarial analysis, all employees were expected to receive benefit payments under the self-funded health plan that markedly exceeded their after-tax premium payments, and in practice, all (or nearly all) employees received payments from the plan that exceeded their after-tax contributions.

. . . Situation 2. The facts are the same as Situation 1, except the employer also provided employees with the ability to enroll in coverage under a wellness plan which would independently qualify as an accident and health plan under Code Sec. 106. Participants in the wellness plan paid a pre-tax employee contribution through a Code Sec. 125 cafeteria plan. The wellness plan provided participants with health-related wellness activities at no charge to the employees. Typically, if the employee’s net take-home pay after receiving the fixed cash payment from the self-funded health plan exceeded the amount of the employee’s net take-home pay prior to implementing the plans, the wellness plan provided that the excess was paid in the form of flex credits that could be used for benefits under the Code Sec. 125 cafeteria plan such that the net take-home pay of each employee who participated in the plans generally remained unchanged.

The promoters contended that these payments are tax-free under Code §106[1] and §104[2]. Regarding Situation 1, the CCA observed that, while the participants received a payment for engaging in certain activities related to health, the arrangement did not involve a risk of economic loss or fortuitous event. Accordingly, there was no insurance for federal income tax purposes. Similarly, because there was no insurance risk, there was no “risk shifting,” so the arrangement did not “have the effect of insurance.” Resultantly, amounts received through the plan were not excluded from income as provided for in the code.

Now looking at Situation 2, the result was the same for the self-funded health plan, according to the CCA. However, the flex credits awarded under the wellness plan were excluded from the income of a participating employee unless used to purchase taxable benefits under the Code §125 cafeteria plan, such as whole life insurance coverage or a gym membership. In that instance, the flex credits used to purchase the taxable benefits under the cafeteria plan were included in the gross income and wages of the participating employee.




The brochures and PowerPoints are impressive, matched only by the sales skills of the promoters. But, let’s be careful out there and not pull these triggers without the blessings of your CPA and attorney.

[1] § 106 Contributions by employer to accident and health plans.

(a) General rule.

Except as otherwise provided in this section, gross income of an employee does not include employer-provided coverage under an accident or health plan.


[2] § 104 Compensation for injuries or sickness.

(a) Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include—

(3) amounts received through accident or health insurance (or through an arrangement having the effect of accident or health insurance) for personal injuries or sickness (other than amounts received by an employee, to the extent such amounts (A) are attributable to contributions by the employer which were not includible in the gross income of the employee or (B) are paid by the employer.


Not everyone is an expert on health care reform. But the folks at J. Smith Lanier, one of our endorsed services providers, are.  For this reason they created a publication called the Health Care Reform Alert. J. Smith Lanier has been providing these to its clients since 2010 when the bill was passed and now offers it to the members of ABA. It is J. Smith Lanier’s intention in the alerts to take the many pages generated by the Centers for Medicare and Medicaid Services, U.S. Department of Labor or Treasury and filter them down into terms that all can understand. For more information on how J. Smith Lanier can help your bank, contact Tom Younger at (256) 890-9027.