Fixed-Indemnity Policy Proceeds Are Taxable to Employees

Publisher: Benefits Square

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Fixed-Indemnity Policy Proceeds Are Taxable to Employees

On June 9, 2023, the IRS issued guidance on the taxation of fixed-indemnity health insurance policies that provide payments to participating employees when they complete a health-related activity that is available at no cost or is covered by other insurance. These programs are often marketed as “no-cost wellness programs” that promote “tax free” reimbursements with the potential to provide significant payroll tax savings to employees and the employer. This guidance reinforces the IRS’ earlier concern about the tax treatment of these arrangements. The guidance concludes that the employer must treat payments to employees under the fixed-indemnity policy as taxable wages.