Article by Ed Lenz and Alden J. Bianchi
Several ASA members have reported being approached by platform providers offering benefit plans loosely described as “wellness” programs. Employee premiums under these arrangements are paid on a pretax basis through a Section 125 cafeteria plan. The claim is that, properly structured, these programs reduce employees’ taxable income, with corresponding employer payroll tax savings. The key words are “properly structured.”
The Treasury Department and the IRS have scrutinized wellness programs similar to what are currently being marketed and have disagreed that those programs resulted in the claimed tax savings. The critical shortcoming in the arrangements was that they were self-funded. The government’s view is that self-funded arrangements lack the required risk shifting to qualify as insurance. In the absence of risk shifting, the programs cannot, in the government’s view, qualify for the favorable tax treatment accorded health insurance.
Some suppliers of these wellness programs purport to have addressed the government’s concerns regarding the lack of risk shifting by representing that the benefits are furnished under a policy of insurance issued by a licensed health insurance carrier. But it does not appear that those concerns have actually been addressed.
To qualify as insurance, there must be some risk of loss based on the fortuitous occurrence of a stated contingency. The IRS has held that merely receiving payments for engaging in certain wellness activities, for example, does not involve such a risk—and thus all amounts received through the plan that exceed actual premiums must be included in income and wages. Merely dropping a benefit plan, program, or arrangement into an insurance “wrapper” does not result in the shifting of risk. That a supplier asserts that state insurance regulators have approved such a product is not necessarily determinative without knowing what representations were made to the regulators or the extent to which the regulators verified those representations.
These products require (through some combination of incentives and negative elections) an employee to reduce his or her compensation each pay period by some substantial amount based on the assurance that the employee will be made whole each month in the form of a (cash) benefit, which may or may not be taxable. It is not apparent how this results in the actual shifting of risk. Accordingly, arrangements structured in this way do not appear to support the claimed tax benefits and therefore cannot be recommended.
Given the complexity of the legal issues and the potential tax consequences to both the employer and its employees, staffing firms considering adopting such plans should ask the providers to provide a formal IRS taxpayer opinion letter based on the facts of the specific arrangement. At a minimum, they should consult with their own legal or tax advisers.
Bianchi is a member of the law firm Mintz, Levin, Cohn, Ferris, Glovsky & Popeo P.C. and chairman of the firm’s employee benefits and executive compensation practice; Lenz is senior counsel of the American Staffing Association and senior adviser in the Mintz Levin Washington, DC, office.
