Employers falling prey to bogus “wellness” and fake “medical expense reimbursement” plans
An old tax avoidance scheme is making the rounds again. Employers should be aware so that when it comes knocking, you know how to respond.
Here’s the sales pitch to be on the lookout for.
A vendor may contact you offering to set up a wellness or “preventative services” plan for your employees. Then you’re told that employees can get more robust benefits and can buy supplemental insurance without decreasing their take home pay. They promise tax savings for you, too, by avoiding FICA and other payroll/employment taxes.
Your employees agree to sign up using pre-tax salary reductions. Meanwhile, the vendor collects a fee to administer the program.
Employees may then complete certain activities to participate in a so-called wellness program. Some of those activities could be:
- Calling a health coach
- Completing a risk assessment online
- Attending a wellness webinar
- Engaging in another free or low-cost wellness related activity
These activities usually have no direct out-of-pocket cost to the employee. And sometimes, there’s no activity at all.
The employee receives their tax-free wellness payment, and their take-home pay is now the same as it was prior to using the wellness plan salary reductions. In some cases, the vendor might even promise to increase take-home pay.
It sounds too good to be true.
You may be thinking “this sounds great! Where do I sign up?” The problem with this scheme is that it is too good to be true. In the view of the Internal Revenue Service (IRS), these are not true wellness programs but rather illegal tax avoidance schemes. No employer wants involvement in allegations of tax evasion. Employees may face tax consequences as well.
Steer clear of these programs.
The answer? Stay away from these programs. They might show up disguised as self-insured medical reimbursement plans. Or they could be paired with legitimate benefits like a dental or vision plan—but at the core they are all the same.
But there is a right way to give your employees a tax break.
Employers everywhere are struggling to keep their people. A scheme like this could look really enticing when many are at their most vulnerable.
Good news prevails. There is a compliant way to give your employees (and your organization) a tax break – a Section 125 Plan. These plans help allow payment for qualifying benefits on a pre-tax basis through employee salary reduction.
Bogus Versus Compliant Wellness Program
|
Bogus Wellness Program | Compliant Wellness Program |
Program is usually funded by the employer |
|
X |
Program is typically funded through employee salary reduction |
X |
|
Salary reduction reduces the employee’s take home pay |
|
X |
The employee receives supposed tax-free payments for non-medical expenses not defined under federal tax rules. |
X |
|
The employee receives tax-free payments for reimbursement of compliant medical expenses as defined under federal tax rules. |
|
X |
While most employers offer a Section 125 Plan, they often set it and forget it. The problem: employees aren’t aware of the benefits available. And they aren’t getting the education they need to really understand how to set up and use their benefits.
Learn more about setting up and promoting your Section 125 Plan and benefits
American Fidelity helps employers succeed in benefits management. We can help you find the right education to get and keep good people. We can also help you understand benefits compliance so you’re armed when schemes like this arise. We can help
This blog is up to date as of June 2022 and has not been updated for changes in the law, administration or current events.