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Commonly Asked Questions

From the desk of Larry Grudzien

Fixed-Indemnity Wellness Programs

June 12, 2024
 Q: A consultant contacted one of my clients selling a wellness fixed indemnity program which adds new health benefits for employees while saving my client and its employees' taxes. Employees would participate in this coverage by making large pretax payroll deductions which will reduce their taxable incomes and save their employers' employment taxes while the employees save on both employment and income taxes. Under the program, employees will then receive reimbursements for engaging in certain health-related activities so that their after-tax take-home pay remains the same or is increased. This program is sold to employers and their employees for its potential tax savings in the thousands or millions of dollars. 
Is what being sold to the employer and its employees true? 
A: No. The IRS has found that the benefits provided under such a program to be taxable income subject to employment taxes.
In June 2023, IRS issued Chief Counsel Advice Memorandum 202323006 regarding the tax treatment of a wellness plan using a fixed-indemnity insurance policy. Under a fixed-indemnity health insurance policy, it pays covered individuals a specified amount of cash for the occurrence of certain health-related events, such as office visits or days in the hospital. Any amount paid under the policy is not related to the amount of any medical expense incurred or coordinated with other health coverage.
The IRS found that payments under the policy were includible in employees’ gross income if the employee had no unreimbursed medical expenses related to the payment; these payments were also wages for purposes of FICA, FUTA, and federal income tax withholding. 
IRS further found that the income exclusion under Code Section 105(b) is available only for amounts paid to reimburse expenses incurred for medical care and does not apply to amounts that are received regardless of whether medical care expenses are incurred. In this situation, however, employees received $1,000 per month regardless of whether they had any unreimbursed medical expenses (e.g., because the activity triggering the payment did not cost the employee anything or was reimbursed by other coverage). 
IRS also found that under Code Section 104(a)(3), an employee’s gross income does not include amounts received through accident or health insurance (or through an arrangement having the effect of such insurance) for personal injuries or sickness. However, the exclusion does not apply to the extent that the amounts are attributable to employer contributions that were not includable in the employee’s gross income (including cafeteria plan salary reductions) or paid by the employer.
If an employer implemented one of these wellness programs, it must consider terminating the plan and the possibility of an IRS payroll examination. The IRS typically seeks to collect taxes, penalties and interest related to the failure to withhold and remit taxes when due and would most likely assert penalties based on the employee’s gross income.
Link to Chief Counsel Advice Memorandum 202323006: 
If you have any comments or questions regarding any of the above information, please do not hesitate to call me at (708) 717-9638 or e-mail me at


Beware of Companies Misrepresenting Nutrition, Wellness and General Health Expenses as Medical Care for FSAs, HSAs, HRAs and MSAs



March 18, 2024



From a recent IRS News Release:


Issue Number:  IR-2024-65


IRS alert: Beware of companies misrepresenting nutrition, wellness and general health expenses as medical care for FSAs, HSAs, HRAs and MSAs


WASHINGTON – Amid concerns about people being misled, the Internal Revenue Service today reminded taxpayers and health spending plan administrators that personal expenses for general health and wellness are not considered medical expenses under the tax law.


This means personal expenses are not deductible or reimbursable under health flexible spending arrangements, health savings accounts, health reimbursement arrangements or medical savings accounts (FSAs, HSAs, HRAs and MSAs).


This reminder is important because some companies are misrepresenting the circumstances under which food and wellness expenses can be paid or reimbursed under FSAs and other health spending plans.


“Legitimate medical expenses have an important place in the tax law that allows for reimbursements,” said IRS Commissioner Danny Werfel. “But taxpayers should be careful to follow the rules amid some aggressive marketing that suggests personal expenditures on things like food for weight loss qualify for reimbursement when they don’t qualify as medical expenses.”


Some companies mistakenly claim that notes from doctors based merely on self-reported health information can convert non-medical food, wellness and exercise expenses into medical expenses, but this documentation actually doesn’t. Such a note would not establish that an otherwise personal expense satisfies the requirement that it be related to a targeted diagnosis-specific activity or treatment; these types of personal expenses do not qualify as medical expenses.


For example: A diabetic, in his attempts to control his blood sugar, decides to eat foods that are lower in carbohydrates. He sees an advertisement from a company stating that he can use pre-tax dollars from his FSA to purchase healthy food if he contacts that company. He contacts the company, who tells him that for a fee, the company will provide him with a ‘doctor’s note’ that he can submit to his FSA to be reimbursed for the cost of food purchased in his attempt to eat healthier. However, when he submits the expense with the 'doctor's note', the claim is denied because food is not a medical expense and plan administrators are wary of claims that could invalidate their plans.


FSAs and other health spending plans that pay for, or reimburse, non-medical expenses are not qualified plans. If the plan is not qualified, all payments made to taxpayers under the plan, even reimbursements for actual medical expenses, are includible in income.


The IRS encourages taxpayers with questions to review the frequently asked questions on medical expenses related to nutrition, wellness and general health to determine whether a food or wellness expense is a medical expense. provides more information regarding details and requirements for deductibility of medical expenses; taxpayers can also review Can I Deduct My Medical and Dental Expenses? and Publication 502, Medical and Dental Expenses.


If you have any comments or questions regarding any of the above information, please do not hesitate to call me at (708) 717-9638 or e-mail me at

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