Supplemental and Wellness Benefits Received May be Taxable
By: Thomas Markle
Many employers offer their employees various "supplemental benefits," such as accident insurance, cancer insurance, or critical disease insurance. The IRS has recently ruled that, to the extent the employer pays the cost of these benefits (or the employee contribution is made "pre-tax" through a cafeteria plan), the benefits received are taxable income to the employee. A common supplemental plan design may pay $100 for each day of hospitalization confinement or $1,000 if an employee contracts cancer. This ruling, Chief Counsel Memorandum 201703013, went a disturbing step further and concluded that the benefits received should also be subject to employer withholding and FICA and FUTA taxes. Since these benefits are usually provided through an ancillary carrier, it would be difficult for the employer to determine what, if any, tax withholding rules apply if a carrier pays the benefits.
Additionally, to the extent an employer funds wellness benefits on a fixed indemnity basis (e.g., employee receives $100 for completing a health risk assessment or $200 for completing various clinical tests) those amounts received would be taxable to the employee.
In light of this ruling, employers who offer supplemental or wellness benefits on a tax-free basis (either at no employee cost or if the employee cost is pre-taxed through a cafeteria plan) should review those benefits and make any necessary changes. Employers should also coordinate this with any insurer that provides these supplemental benefits. To the extent employee contributions are made, this result can be avoided by requiring the employee contribution "after tax."
Although many supplemental benefits are not subject to the provisions of the Affordable Care Act, the conclusions in this CCM are based on employment tax provisions in the Internal Revenue Code, meaning that even though these plans may be exempt from ACA requirements (e.g., regulations on no pre-existing conditions, OOP maximums, etc.), this ruling would still apply.
If you have any questions regarding this ruling please contact a member of Barrett McNagny's Employee Benefits Group.