The Internal Revenue Service (IRS) has released an internal memorandum addressing the tax treatment of payments from fixed indemnity health coverage. According to this guidance, if an employee is not taxed on the premiums for fixed indemnity health coverage (the premiums are paid by the employer or by employees on a pre-tax basis through a cafeteria plan), any payments from the coverage must be included in the employee’s gross income and wages. These same rules also apply to wellness programs that provide fixed indemnity benefits for engaging in wellness activities.
ACTION STEPS
The IRS’ memorandum does not address how employers should administer fixed indemnity payments that are taxable to employees. When employees are not taxed on the premiums for fixed indemnity coverage, employers should work with their carriers to implement a process for tax withholding and reporting. To avoid these tax issues, employers should consider requiring that employees pay for their fixed indemnity coverage on an after-tax basis outside of their cafeteria plans.
