By: HUB’s EB Compliance Team
In recent months, vendors offering so-called “double-dip” health plan arrangements have adjusted their programs and related arguments, and have subsequently concluded that their programs do not meet the definition of an illegal double-dip arrangement under IRS rules. This effort has been emboldened by recent actions by the IRS and Department of the Treasury to pull back efforts to finalize certain rules. However, the status of these arrangements remains the same; they are illegal double-dip schemes and employers are still best advised to avoid them.
A Brief Review of Double-Dips
Double-dip health programs most often involve a large pre-tax employee contribution that appears to fund actual benefits, followed by a non-taxable “refund” of all or most of that pre-tax contribution back to the employee. They may also offer valid tax-preferred benefits (like telehealth or hospital indemnity coverage) alongside the impermissible tax benefits in a mix intended to mask the underlying scheme. The issue is that taxes usually need to be paid at some point, and if an employee doesn’t pay taxes on income (because it is diverted to a “pre-tax” health plan), they cannot also receive that money back from that health plan, and use it to pay for things, without having to pay taxes. In doing so, you are “double dipping” from an approved IRS tax exclusion and therefore are paying no tax overall. This is clearly an impermissible setup under the law.
Post-Tax Components
Recent offerings from certain vendors have paired the pre-tax employee contribution noted above with a post-tax employee contribution. The presence of a post-tax employee contribution, per the vendors’ logic, means that the non-taxable “reimbursements” to the employee are permissible. The argument is that they are permissible because a portion of the premium was paid on a post-tax basis, and therefore already taxed.
However, these setups still do require enrollment in a pre-tax component. The post-tax cost does not stand alone. In addition, the overwhelming majority of the cost of the plan is from the pre-tax component, not the post-tax component. So, we are left with the same situation as the typical double-dip scheme noted above. The reimbursements back to the individual are coming from the pre-tax component, not the post-tax one. It belies logic to think that the presence of a small post-tax cost allows much larger dollar amounts to be reimbursed tax free. Therefore no matter how structured, allowing individuals to not pay taxes on income on one end, and then also not pay taxes when using the benefit of that same money, is by definition illegal.
A Reminder on IRS Recent Guidance
As noted in one of Hub’s previous publications, found here, the Treasury Department had issued proposed rules regarding indemnity plans. In the final release of the rules (found here), the IRS still held true to the original intent of the guidance, which is that short-term fixed-indemnity plans are not to be considered full health plans. However, they also chose NOT to provide final guidance regarding collecting and paying taxes on the amounts paid through indemnity plans that have already been excluded from income. Hub has previously summarized these final rules as well, found here. The IRS and Treasury commented specifically that no inference should be drawn from this decision to delay guidance, but many vendors, predictably, have taken this reticence as a sign to move forward. Echoing the concerns raised in prior Hub articles, Treasury made clear in the preamble to the final rules that concerns over these plans are still present. In addition, they have pledged that compliance efforts over exclusions will continue. We do not read Treasury’s reluctance to address these rules at this time as signaling a permissive stance that would override the many times they have addressed the double-dip issue before, and Treasury’s collective assessment that these double-dip arrangements are impermissible under the law.
The Risks Reviewed
To reiterate the risks, if an employer chooses to sponsor one of these programs, the IRS may review the program and determine that taxes were not properly paid. The employer and employees would then owe all accrued back taxes, plus interest (which the IRS cannot waive), plus significant penalties for not withholding enough taxes. The employer may also face additional costs to correct and re-issue Form W-2s, plus potentially absorbing the expense of refiling all affected tax returns. And finally, criminal penalties could also apply if an employer plan sponsor institutes a double-dip program knowingly.
Conclusion
Despite vendor communications to the contrary, nothing has changed in the recent past that would result in the IRS or Treasury assessing double-dips as permissible employer offerings. The risks continue to far outweigh any benefits, and efforts should still be made to avoid such arrangements at all costs.
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.