Last week, the IRS’s Office of Chief Counsel released a Memorandum announcing that benefits paid under a fixed indemnity health benefit program that is either funded by the employer, or funded by employees through contributions made on a pre-tax basis, are included in the employee’s gross income as taxable wages. This would require the employer to withhold and pay applicable employment taxes, including income and FICA. The rationale of the IRS, as explained in the Memorandum, is that fixed indemnity health benefit programs pay a fixed dollar amount for certain health-related events, such as days in the hospital. The amount paid is not related to the amount of any medical expense incurred or coordinated with any other health coverage. Consequently, the usual tax-free treatment of benefits paid by a group health plan is not available because the amounts paid under the hospital indemnity program are not a reimbursement of medical care under Code Section 213(d). In contrast, payments made from a fixed indemnity health plan are still tax-free to the extent that the premiums for such coverage are paid by the employee on an after-tax basis. Thus, if an employer’s benefit program includes a voluntary hospital indemnity plan funded by the employer or employees on a pre-tax basis, they may want to reconsider and instead have contributions for coverage paid by employees on an after tax basis to avoid the imposition of income and employment tax withholdings on any benefit payments. We’re Here to Help If you have questions regarding the memorandum as it pertains to your contract, call us at 1.800.250.2741 or email us at firstname.lastname@example.org.