Plan Compliance
Is your preventive care
management plan compliant?
If somebody sold your business a preventive care management plan, you may have a good one. A lot of businesses do not, and most of them have no idea.
We are not going to name companies. We are going to show you the rules, in plain English, and a short checklist you can run against whatever you are in right now. If it passes, great. Keep it. If it does not, you should know that before an auditor tells you.
Start Here
What a plan is actually allowed to do
A preventive care management plan sits inside a Section 125 cafeteria plan. The employee puts money in before taxes. The plan pays for qualified medical care. Both sides save on payroll tax, and the employee gets more benefits than they had before.
That is the whole idea, and it works. The IRS has said so for years. The trouble starts when a plan is built to produce a bigger tax saving than the rules allow.
The Warning Signs
What puts a plan offside
It pays your employees to do an activity every month.
This is the most common one, and it is the easiest to spot. If the plan requires an employee to do something each month to keep the benefit, book a telehealth visit, log a wellness activity, order something through a pharmacy service, that is an activity based design.
The IRS addressed this kind of arrangement directly, in an Office of Chief Counsel memorandum (Number 201703013, dated January 20, 2017). A benefit that is paid for doing an activity is not the same thing as a reimbursement for qualified medical care under Section 213(d), and the tax treatment does not follow.
There is a practical problem too. Somebody at your company has to track those activities every month, forever, and prove it later. That is your time and your liability.
Ask your provider: Does an employee have to do anything each month to keep this benefit? If the answer is yes, ask them to show you in writing why that is allowed.
It puts an insurance payout on the before-tax side, and nobody tells your employee.
This one gets told wrong in both directions, so it is worth slowing down on. A fixed indemnity policy is not a banned product. Accident, critical illness and hospital plans are indemnity products, and they sit next to good plans every day. The problem is never the product. It is how the premium is paid.
Pay that premium with after-tax dollars and the claim pays out tax free. Nothing to report, nothing to explain later. That is how it is meant to work.
Run the same premium through the plan before taxes, as a medical expense, and the math flips. The employee saves a little on the way in, and then owes tax on the way out, because that claim payment is now income they have to report.
That is what defeats the whole point. A worker takes a payout, sets none of it aside, and finds out at tax time. If nobody told them, the first call goes to the business owner, and the second one goes to whoever sold the plan.
Ask your provider: If there is an indemnity policy in this plan, is its premium paid before taxes or after? And if it is before, who is telling my employees the claim is taxable to them?
The money comes back out through the cafeteria plan itself.
This one is harder to see from the outside, and it is worth asking about directly. If the wellness benefit runs only through the Section 125 cafeteria plan, and employees are reimbursed through that same plan with a credit for taking part, the reimbursement is taxable. The same is true of “flex credits” that hand back more after taxes than went in before taxes.
Ask your provider: What is the reimbursement paid out of, and is it taxable to my employee?
The plan documents do not exist, or nobody will show them to you.
Your plan is a written plan. There are documents behind it, and there are ERISA obligations that come with them. If you ask to see the compliance framework and the plan documents, and the answer is that it is proprietary, that is your answer.
The tax code is public. Nobody who is following it needs to hide how.
Ask your provider: Can I see the plan documents and the compliance framework? Can my CPA?
Worth Being Precise About
One thing the IRS did not say
It matters, because you will hear it said the other way. The IRS has never ruled that these plans are illegal, and it has never said that every wellness program is offside. What it addressed were specific designs, the ones above, that were built to produce a tax result the rules do not allow.
Plenty of preventive care management plans are built correctly and hold up fine. The question is never “is this kind of plan allowed.” It is “is mine built the way the rules require.”
The Short Checklist
Six questions, run against what you have now
Six answers in the right direction means you are probably fine. Two or more in the wrong direction is worth a second opinion.
Does an employee have to complete a monthly activity to keep the benefit?
Should be NoIf an indemnity policy is part of the plan, is its premium paid with after-tax dollars?
Should be YesIs the reimbursement taxable to your employee?
Should be NoAre there written plan documents, and can you see them?
Should be YesWas the plan drafted by attorneys who work in this area?
Should be YesWill they get on a call with your CPA and walk through it?
Should be YesHow Ours Is Built
What we do differently
We restructure Section 213(d) benefits so there is no monthly activity to track. Everything on the before-tax side is qualified medical care, telehealth, prescriptions and wellness, and nothing else. No indemnity premium rides along on that side, so there is no claim payment your employee has to report as income later. The plan documents were drafted by ERISA attorneys, and we will show them to you and to your CPA before you commit to anything.
We have been through audits. We submitted our cafeteria plan documents and did not hear back, because everything was where it should be.
The short answer
A preventive care management plan is compliant when it reimburses qualified medical care under Section 213(d) through a written Section 125 cafeteria plan, with no monthly activity required of the employee, and plan documents you and your CPA can read. Plans go offside when the benefit is paid for completing an activity, or when the reimbursement runs back out through the cafeteria plan and is taxable to the employee. A fixed indemnity policy can sit inside one of these plans and be fine, but only if its premium is paid with after-tax dollars. Pay that premium before taxes and the claim payment becomes income the employee has to report, which takes back the saving they were promised. The IRS has never ruled these plans illegal; it has addressed specific designs built to produce a tax result the rules do not allow.
What business owners ask us first
Is a preventive care management plan legal?
Yes, when it is built correctly. The IRS has never ruled that preventive care management plans are illegal, and it has never said every wellness program is offside. What it addressed were specific designs built to produce a tax result the rules do not allow. The question is never whether this kind of plan is allowed. It is whether yours is built the way the rules require.
What makes a preventive care management plan non compliant?
Two designs put a plan offside outright: paying the benefit for completing a monthly activity, and running the reimbursement back out through the Section 125 cafeteria plan so it is taxable to the employee. A third design is not offside, but it quietly costs your employees money: putting a fixed indemnity premium on the before-tax side, which turns the claim payment into income they have to report. A fourth warning sign is a provider who will not show you the plan documents.
Can a wellness plan require employees to do a monthly activity?
Not if the tax treatment depends on it. IRS Office of Chief Counsel Memorandum 201703013, dated January 20, 2017, addressed this directly. A benefit paid for doing an activity is not a reimbursement for qualified medical care under Section 213(d), and the tax treatment does not follow. There is a practical cost too: somebody at your company has to track those activities every month and prove it later.
What is the double dip in a Section 125 wellness plan?
It is when money goes into the plan before taxes and a benefit comes back out treated as though it had been paid for after taxes. The tax code does not let you have it both ways. Where this usually shows up is an indemnity policy whose premium is run through the plan as a medical expense before taxes. That does not make the claim tax free. It makes it income the employee is supposed to report, and most of them are never told.
Can a fixed indemnity policy be part of a compliant plan?
Yes, in some cases. It is the structure that matters, not the product. If the premium is paid with after-tax dollars, the claim pays out tax free and there is nothing for your employee to report. If the premium is run through the plan before taxes as a medical expense, the claim payment becomes income they have to report, which takes back the saving they were promised and leaves them with a surprise at tax time. Ask which way yours is built before you assume.
How do I know if my preventive care management plan is compliant?
Run six questions against it. Does an employee have to complete a monthly activity to keep the benefit? Is the reimbursement taxable to your employee? Those two should be no. If an indemnity policy is part of the plan, is its premium paid with after-tax dollars? Are there written plan documents you can see? Were they drafted by attorneys who work in this area? Will the provider get on a call with your CPA? Those four should be yes.
Can I switch preventive care management plans?
Yes. Moving a preventive care management plan is ordinary work, and your employees usually do not feel it. The sooner you look, the easier it is.
Where This Comes From
Every one of these is public
These are public documents. Anyone can read them, including your CPA, and we would rather you did.
- IRS Office of Chief Counsel Memorandum 201703013 (January 20, 2017)
- Internal Revenue Code Sections 213(d), 106(a), 105(b), 104(a)(3) and 125
- Treasury Regulation 1.105-11(i)
- Federal Register, Volume 78, June 3, 2013, page 33,161 (activity based wellness folded into the ACA health contingent model)
If you are already in a plan
You are not stuck. Moving a preventive care management plan is ordinary work, and your employees usually do not feel it. The sooner you look, the easier it is.
We will read what you have and tell you what we see, in writing. If your plan is fine, we will tell you that too.
Not financial, tax, or legal advice. Ten Point Financial Group are licensed insurance agents. Business owners should consult their own CPA or benefits attorney for guidance specific to their business.