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 ‭(Hidden)‬ Catalog-Item Reuse

Help Your Clients With Their Fixed Indemnity Health Plans

The Office of Chief Counsel of the IRS released a memorandum on Jan. 20 regarding the tax treatment of benefits paid by fixed indemnity health plans.
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The first two weeks of the new presidency have garnered serious attention—especially around President Trump’s executive orders and the confirmation hearings for several of his appointments.

Independent insurance agents also anticipate updates regarding the Affordable Care Act (ACA). At this point, there are a number of possible outcomes, and although the reconciliation process may be used to repeal some parts of the ACA, more congressional support is necessary for a replacement. Many agents and investment advisers also share concern about the new Department of Labor fiduciary regulations scheduled to go into effect in April 2017—will they be postponed, revised or eliminated?

On top of all this, the Office of Chief Counsel of the IRS released a memorandum on Jan. 20 regarding the tax treatment of benefits paid by fixed indemnity health plans. Two significant points in the memorandum include:

1) Are payments to an employee under an employer-provided fixed indemnity health plan excludible from the employee’s income under Internal Revenue Code §105?

2) Are payments to an employee under an employer-provided fixed indemnity health plan excludible from the employee’s income under Internal Revenue Code §105 if the payments are made by salary reduction through a §125 cafeteria plan?

The memorandum makes it clear: When it comes to an employer-provided fixed indemnity health plan, payments are not excluded from the employee’s gross income in the event that the employer’s coverage payment by the fixed indemnity plan is excluded from the employee’s gross income.

In contrast, when the premiums are paid with after-tax dollars, the payments are excluded from the employee’s gross income. Further, an employer may not exclude payments under an employer-provided fixed indemnity health plan if the plan’s premiums were made by salary reduction through a §125 cafeteria plan.

This outcome means that employers and health plan administrators will have to know whether the employee or the employer provided fixed indemnity health plan premiums on a pre-tax basis—because it’s a matter of treating the employee’s benefits as taxable income.

This also means that employees will find these types of programs less attractive because of the tradeoff: Either the employer or employee makes contributions on an after-tax basis, or the benefits are taxed when the employee receives them.

The bottom line: Independent agents should alert their clients who have these types of health insurance programs.

Dave Evans is a certified financial planner and an IA contributor.

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Tuesday, June 2, 2020
Employee Benefits