By: HUB’s EB Compliance Team

Updated 01/09/25: The rules described below have been struck down by a court, but appeals could be forthcoming. More information is available here.

The three agencies overseeing the Affordable Care Act (“ACA”) recently released updated rules (fact sheet here) that affect fixed indemnity policies. They also postponed, for now, finalizing rules that would have made double-dip schemes harder, but their position on these fraudulent schemes remains unchanged.

Background

In 2023, the agencies proposed rules on a variety of topics, including short-term, limited-duration insurance, fixed indemnity benefits, and the tax treatment of certain insurance payments. Among the proposed changes, the proposed rules would have put some tighter restrictions on fixed indemnity coverage and required a new notice for fixed indemnity coverage. Group fixed indemnity coverage generally pays a fixed dollar amount per day (or other period) of hospitalization or illness, regardless of the amount of expenses incurred. These include traditional hospital indemnity policies as well as critical illness policies.

Most notably, the proposed rules would have specified that payments from an accident or health insurance policy or plan would not be tax free if the amounts were paid without regard to the amount of medical expenses incurred. As noted above, this is a key feature of fixed indemnity policies. This would have meant that every fixed indemnity payment would be taxable. It would have effectively ended any argument that these double-dip schemes that rely on fixed indemnity or similar policies can reimburse on a tax-free basis.

Fixed Indemnity Rules

The final rules do not adopt the entirety of the proposed fixed indemnity rules. For employers, the key change is that group fixed indemnity policies are subject to a new notice requirement. The notice, which must be in 14-point font, is intended to make clear that the policy is not health insurance. It reads as follows:

IMPORTANT: This is a fixed indemnity policy,
NOT health insurance

This fixed indemnity policy may pay you a limited dollar amount if you’re sick or hospitalized.  You’re still responsible for paying the cost of your care.

  • The payment you get isn’t based on the size of your medical bill.
  • There might be a limit on how much this policy will pay each year.
  • This policy isn’t a substitute for comprehensive health insurance.
  • Since this policy isn’t health insurance, it doesn’t have to include most Federal consumer protections that apply to health insurance.

Looking for comprehensive health insurance?

  • Visit Healthcare.gov or call 1-800-318-2596 (TTY: 1-855-889-4325) to find health coverage options.
  • To find out if you can get health insurance through your job, or a family member’s job, contact the employer.

Questions about this policy?

  • For questions or complaints about this policy, contact your State Department of Insurance. Find their number on the National Association of Insurance Commissioners’ website (naic.org) under “Insurance Departments.”
  • If you have this policy through your job, or a family member’s job, contact the employer.

The required notice is included in the regulations. It must be displayed on the first page of any marketing, application, or enrollment materials that are provided to participants. Employers should ensure that any fixed indemnity policy they buy contains the required notice.

No Double-Dip Rules…for Now

The proposed rules on accident or health plan/policy reimbursements were not finalized. Some commenters raised concerns that additional guidance would be needed to address the payroll tax implications of treating these payments as taxable. Others raised concerns that the rules might be too broad.

The Treasury Department (which is the only agency responsible for this subset of the rules) did not finalize the proposal, but they are not abandoning this issue. They said that they plan to address these concerns in future guidance and that no one should infer from this that they necessarily agree with these comments.

Most notably, however, Treasury made its view on these double-dip schemes abundantly clear with the following quote from the preamble:

[T]he Treasury Department’s and the IRS’s concerns have recently escalated after identifying an increasing number of arrangements, some involving fixed indemnity plans and policies, that distribute cash benefit payments, purportedly for medical expenses, even if any expenses incurred may already have been reimbursed through other coverage, or participants do not incur any medical expenses…. In some cases, no medical expenses are incurred and participants simply complete certain health-related activities. Benefit payments from such accident and health plans that are not made on account of medical expenses incurred generally would not qualify for exclusion from gross income, FICA, FUTA, or Federal income tax withholding. [p.23345-23346]

This quote shows that Treasury and the IRS are on to these promoters who try to sell tax-free payments for completing wellness activities. As the IRS has been clear in several Chief Counsel Memos (which HUB has covered previously), these plans are not legal.

Conclusion

The final fixed indemnity rules simply add another notice to the long line of communications that are already required for plan participants. However, that communication should be included by carriers; employers will simply need to remember to include it in their open enrollment communications.

On the double-dip front, the lack of final rules here is disappointing as it would have created a much stronger argument against these schemes. However, the strong language in the preamble and the promise of future guidance do create hope that there will be more Treasury and IRS pieces in the future that will make the status of double-dip programs even clearer than it is today.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only, and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.