In today’s complex healthcare landscape, employers face mounting pressure to provide
meaningful benefits while controlling costs. Unfortunately, this environment has
created opportunities for non-compliant programs that promise tax advantages and
cash benefits—but deliver serious legal and financial risks instead.
If you’re evaluating population health or supplemental benefit programs for your
organization, understanding the regulatory landscape isn’t optional. It’s essential
protection for your business and your employees.
The Growing Compliance Crisis
Federal agencies have issued multiple warnings about “wellness” or “cash benefit”
schemes that misrepresent themselves as legitimate insurance or tax-advantaged
arrangements. These programs often sound appealing on the surface, but they can
expose both employers and employees to significant consequences:
Unexpected tax liabilities for both the company and workforce
Penalties and back taxes from IRS audits
Legal exposure from regulatory non-compliance
Loss of advertised benefits when programs are shut down
Reputational damage and employee trust issues
The stakes are too high to rely on marketing promises alone. You need to understand
what regulators are actually saying.
What Federal Agencies Are Warning About
IRS Chief Counsel Advice (2023)
In May 2023, the IRS issued Chief Counsel Advice 202323006, warning that certain
employer-funded indemnity benefits routed through payroll could be misclassified as
wages. This makes them fully taxable and subject to FICA and FUTA—eliminating any
supposed tax advantage and creating unexpected liabilities.
Revenue Ruling 69-154: The Long-Standing Standard
The IRS has maintained for decades through Revenue Ruling 69-154 that indemnity
payments beyond actual medical expenses must be reported as taxable income. This
isn’t new guidance—it’s established law that some programs conveniently ignore.
Tri-Agency Final Rule (April 2024)
The Departments of Treasury, Labor, and Health and Human Services jointly issued a
final rule in April 2024 specifically flagging deceptive marketing of fixed indemnity and
“short-term” products. These products often mimic comprehensive health insurance
while avoiding ACA consumer protections, leaving employees vulnerable.
IRS Clarification on Self-Funded vs. Fully Insured
Recent IRS guidance, summarized by Aflac, draws a critical distinction between
self-funded indemnity arrangements (which regulators view as non-compliant) and fully
insured fixed indemnity policies. This distinction matters enormously for compliance.
Four Critical Questions to Ask Any Provider
When evaluating population health or indemnity-based solutions, protect your
organization by asking these essential questions:
- Is it fully insured and state-filed?
Legitimate programs should be filed and approved in the states where they operate.
Self-funded arrangements that bypass state insurance regulation raise immediate red
flags. Look for programs backed by rated insurance carriers with proper state
approvals. - Are premiums handled through a compliant Section 125 cafeteria plan?
Proper tax treatment requires alignment with IRS Section 125 rules. Programs that
promise tax advantages without this structure are likely non-compliant and could
trigger audits. - Are indemnity payments treated according to the IRS “excess benefit”
rule?
Compliant programs apply long-standing Section 105 and 213(d) guidance, ensuring
that only benefits beyond actual medical expenses are taxable. Programs that promise
all benefits are tax-free are contradicting established IRS positions. - Does the program rely on official law and federal guidance—not
loopholes?
Be wary of programs that claim to have found “creative” interpretations or loopholes.
Sustainable compliance means alignment with IRS revenue rulings, Chief Counsel
Advice, and federal rulemaking—not workarounds that regulators have already flagged.
Red Flags: What to Avoid
Be especially cautious of any arrangement marketed with these characteristics:
Promises of “tax-advantaged wellness plans” with vague compliance explanations
“Tax-free cash benefits” that seem too good to be true
Self-funded structures that avoid state insurance regulation
Programs that can’t provide clear documentation of state filings and approvals
Vendors who dismiss or downplay federal warnings
Marketing that emphasizes “loopholes” rather than compliance
Federal regulators have repeatedly labeled such programs as non-compliant and
potentially harmful to both employers and employees.
What Compliant Programs Look Like
Legitimate population health and supplemental benefit programs share common
characteristics:
Full insurance backing: Underwritten by rated insurance carriers and filed in
applicable states
Transparent compliance: Clear documentation of how the program aligns with IRS
and DOL guidance
Proper tax treatment: Section 125 cafeteria plan structure for premiums and
appropriate handling of benefit payments
Regulatory alignment: Programs built on established law, not creative
interpretations
State approvals: Documented filings and approvals in states where offered
The Bottom Line: Due Diligence Protects Everyone
Your responsibility as an employer extends beyond finding cost-effective benefits. You
must also protect your organization and employees from compliance risks that could
result in unexpected taxes, penalties, and legal exposure.
Before implementing any population health or supplemental benefit program: - Ask the four critical questions outlined above
- Request documentation of state filings and insurance backing
- Consult with your legal and tax advisors about the specific program structure
- Review federal guidance yourself using the links provided
- Be skeptical of promises that sound too good to be true
The regulatory environment is clear: federal agencies are actively warning against
non-compliant arrangements. The programs that survive long-term scrutiny will be
those built on solid compliance foundations, not creative loopholes.
Verify for Yourself
Don’t take anyone’s word for it—including ours. Review the federal guidance directly:
IRS Chief Counsel Advice 202323006 (May 2023)
Revenue Ruling 69-154
Tri-Agency Final Rule (Federal Register, April 2024)
IRS Clarification: Aflac Summary of Indemnity Guidance
Informed decisions start with understanding what regulators are actually saying—not
what vendors claim they’re saying.
Moving Forward with Confidence
The healthcare benefits landscape will continue to evolve, and regulatory scrutiny will
only intensify. By prioritizing compliance alongside cost and coverage, you protect your
organization while providing meaningful benefits to your employees.
When evaluating programs, remember: if a vendor can’t clearly explain how their
program aligns with federal guidance, or if they dismiss regulatory warnings as
irrelevant, that’s your signal to walk away.
Your employees deserve benefits they can count on. Your organization deserves
protection from compliance risks. Both require choosing programs built on solid
regulatory foundations.
Disclaimer: This article is provided for educational and informational purposes only. It
should not be relied upon as legal or tax advice. Employers should always consult with
their trusted legal, tax, or benefits professionals before making decisions regarding
their health benefits.