The Blog

Fixed-Indemnity Policy Proceeds Are Taxable to Employees

On June 9, 2023, the IRS issued guidance on the taxation of fixed-indemnity health insurance policies that provide payments to participating employees when they complete a health-related activity that is available at no cost or is covered by other insurance. These programs are often marketed as “no-cost wellness programs” that promote “tax free” reimbursements with the potential to provide significant payroll tax savings to employees and the employer. This guidance reinforces the IRS’ earlier concern about the tax treatment of these arrangements.

The guidance concludes that the employer must treat payments to employees under the fixed-indemnity policy as taxable wages.

Details About the Fixed-Indemnity Policy

According to the guidance, the employer, through this arrangement, maintains:

  • a group health insurance policy that offers comprehensive health benefits, including preventive care (such as flu vaccinations) without cost-sharing, and
  • a fixed-indemnity health insurance policy.

Employees may enroll in one or both options, or neither option. The fixed-indemnity policy has the following terms and conditions:

  1. Each participating employee makes a monthly pre-tax contribution of $1,200 through the employer’s section 125 cafeteria plan to pay for the employee’s coverage under the fixed-indemnity policy.
  2. The employer forwards the entire $1,200 contribution to the insurance carrier to pay the premium for the fixed-indemnity policy on the employee’s behalf. The employer is not liable for any additional premium payments under the policy.
  3. In return for the premium payment, the insurance carrier provides the following benefits to the employee under the fixed-indemnity policy:
    a. A benefit for each day that the employee is hospitalized.
    b. Wellness counseling, nutrition counseling, and telehealth benefits at no additional cost.
    c. Payment of $1,000 (limited to one payment per month) if the employee participates in certain health or wellness activities. The employee’s use of preventive care (such as vaccinations), which are available without cost-sharing under the employer’s comprehensive group health insurance policy, would qualify the employee for the payment, as would the free wellness counseling, nutrition counseling, and telehealth benefits that are available under the fixed-indemnity policy. The employee would be responsible for paying the cost of any other health or wellness activity that is intended to qualify the employee for the $1,000 payment.
  4. When an employee qualifies for the $1,000 payment under the fixed-indemnity policy, the insurance carrier pays the money to the employer, which then pays the money to the employee via its payroll system.

Taxation of Payments Under the Fixed-Indemnity Policy

The IRS concludes in its guidance that the employer must treat the $1,000 payments to participating employees under the fixed-indemnity policy as taxable wages, because the payments are remuneration for employment under benefit plans funded by the employer through its section 125 cafeteria plan and exceed the amount of the actual expenses for medical care. Therefore, under Code sections 104 and 105, and accompanying regulations, the employer is required to report the payments as taxable income to the employees on IRS Form W-2, and to withhold income taxes and FICA taxes on the payments. The
employer is also required to pay its share of FICA taxes, as well as FUTA taxes, on the payments.

Employer Action

Employers that may have implemented a fixed-indemnity program that provides “tax free” wellness benefits should carefully review the program in light of the recent IRS guidance and should work with their tax professionals to comply with the employer’s tax reporting and collection responsibilities under this new guidance.

Read More

Empowering Employees Through Education

What are your employees’ retirement income goals?


Offering a retirement plan for your employees is an important step in helping them become retirement-ready. At Benefits Square, we believe through effective education, we can guide your employees through each stage of their career — whether they’re just starting out, juggling the demands of mid-life, transitioning to their next act or defining their legacy. From informative educational articles, interactive calculators and ongoing seminars, your employees will have a suite of materials tailored to their common retirement questions.


83% of workers expect their workplace retirement savings will be a source of income in retirement vs. about half of retirees.

Financial wellness begins with a retirement plan

Your employees will have access to personalized wellness and educational topics, covering a full breadth of lifestyle stages, as well as online digital tools, giving them a clear picture of what means the most to them and discovering a path to the future they’ve envisioned.


Quick questions, quick answers

Whether it is selecting one of the frequently asked questions or visiting a breadth of topics in the content library, the site is designed to give your employees a choice, allowing them to customize their experience.


Library of learning

There is a host of content in a variety of formats: videos, calculators, tutorials and educational articles to help your employees learn about financial topics that are most important to them in a digestible manner.


Your dedicated retirement plan consultant (RPC)

To help you achieve retirement plan success, we have a team of dedicated knowledgeable professionals who can assist you with:

  • Fiduciary education
  • Educating employees about retirement plan basics
  • Increasing participation and deferral rates
  • Local point of contact

From the initial enrollment meeting to future ongoing enrollment meetings and seminars, your RPC is available to assist. In addition, our employee education program features a series of educational emails easily delivered to your employees.


To take advantage, it’s as simple as providing us with employee email addresses.
We take care of the rest.


Ongoing employee education

To keep your employees well-informed, we offer a series of educational seminars, articles and emails no matter what stage of their career.

We have a series of seminars featuring the following topics:

  • Preparing for retirement
  • Asset allocation- Understanding market volatility

Our emails provide education on the benefits of saving for retirement, asset allocation and the power of compounding over time.

  • Increasing contributions
  • Preparing for a comfortable retirement (enrollment)
  • Managing your account online
  • Retirement myths and realities
  • Understanding your investments
  • Financial fundamentals

Each seminar features real-life examples in easy-to-understand language. In addition, we provide an attendance sheet and seminar evaluation form.


For more information about how Benefits Square can help your
employees with retirement education, contact us at
(732) 902-0200 or click here to request a call.

Read More