Tax Treatment of Benefits Paid from Self-Funded Health Plans

Chief Counsel Memorandum advises as to the treatment of benefits paid under an employer-provided self-funded health plan where the average amounts received by the employees for participating in a health-related activity predictably exceeds the after-tax contributions by the employees.

Document Excerpt
Yes, the amounts are included in income and wages for reasons including, but not limited to, one or both of the reasons listed below. As a result, the exclusion from gross income under section 104(a)(3) does not apply to the amounts received by the employees.

(1) The employer-provided self-funded health plan does not involve insurance risk, and accordingly, is not insurance (nor does it have the effect of insurance) for federal income tax purposes (including section 104(a)(3)).

(2) The ratio of the average amounts received by the employees for participating in health-related activities to the after-tax contributions by the employees demonstrates that the amounts received by the employees are attributable to contributions by the employer (and not employee after-tax contributions) so that the exclusion under section 104(a)(3) does not apply.

Link

https://www.irs.gov/pub/irs-wd/201719025.pdf

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