An employee receives a payment every month but completes only one wellness activity during the year. What supports each payment?

For an agent, employer, payroll professional, or CPA evaluating a self-insured medical reimbursement plan (SIMERP) or wellness-based payroll tax savings program, that is the question to resolve before accepting the projected savings.

Four issues need separate answers:

• Participation: How often must the employee complete an activity?

• Expense: When is medical care provided, or another potentially eligible expense incurred?

• Payment: When does the plan reimburse an expense or pay a benefit?

• Tax treatment: What supports excluding that payment from income and employment-tax wages?

An annual reimbursement can potentially qualify. An annual activity, standing alone, does not establish that monthly cash qualifies. Section 105(b) addresses reimbursement of incurred medical expenses; §106 addresses qualifying employer-provided coverage. Neither provision establishes a universal monthly medical-visit requirement. IRC §105(b); IRC §106(a); Treasury Regulation §1.105-2.

Annual reimbursement and annual participation are different

An employee might accumulate eligible medical expenses and receive one reimbursement after submitting the required records. The annual payment schedule does not itself disqualify the reimbursement. The expenses, eligibility, coverage period, reimbursement limits, and applicable claims rules still matter. IRC §105(b); 2007 proposed cafeteria-plan regulations, §1.125-6(a)(2).

Monthly payments associated with one annual activity require a different explanation. Participation shows that an activity occurred. It does not necessarily establish that the employee incurred an expense, that a balance remains after other coverage pays, or that the amount received qualifies for exclusion. Treasury Regulation §1.105-2.

The table distinguishes the questions to investigate; it does not approve a particular design. The principal rules are §104, §105, §106, and the medical-reimbursement regulation.

Why an annual requirement may make sense

The strongest explanation starts with a program that provides something throughout the year: qualifying medical coverage, for example. An employee can have coverage in a month without using a medical service. An actual eligible medical insurance premium may also matter without a new medical encounter. IRC §106(a); IRC §213(d)(1)(D).

A program may pair that coverage with an annual participation condition. The wellness regulations recognize participatory programs, including certain rewards for diagnostic testing without requiring a particular result. Separately, health-contingent programs must offer an opportunity to qualify for the reward at least annually, along with other requirements. That annual opportunity is not a rule declaring one activity sufficient for tax-free monthly payments. 29 CFR §2590.702(f).

The agencies expressly explain that satisfying wellness-program rules does not determine the tax treatment of rewards. Their August 26, 2026 guidance addresses administration of certain health-contingent rewards, including enforcement relief concerning retroactive rewards after completion of a reasonable alternative standard. It supplies no new cash-payment tax exclusion. Agency FAQ Part XXV, Q2; FAQ Part 74, Q1.

Identify what the employee receives—and who funds it

Coverage is the protection or medical benefits furnished under a plan. Reimbursement repays an eligible expense. A wellness reward compensates participation or achievement and may take several forms. A fixed-indemnity benefit pays a specified amount when a covered event occurs, rather than calculating the benefit from the employee’s actual bill. Those distinctions affect which tax rules apply. IRC §§105 and 106; wellness regulations; 2024 final-rule preamble, I.E.

For employer-funded or pretax-funded benefits, §105 generally includes payments in income unless an exclusion applies, such as §105(b) for qualifying medical reimbursement. Employee salary reduction through §125 is treated as employer funding for this analysis. Section 125 protects qualifying benefit elections from taxation merely because cash was available; it does not independently exempt every subsequent payment. IRC §§105(a)–(b); IRC §125; CCA 202323006, income-tax analysis.

For genuine accident or health insurance funded with after-tax employee premiums, qualifying benefits for injury or sickness may be excluded under §104(a)(3), even when they exceed actual medical expenses. Mixed funding requires attribution under the applicable rules. After-tax funding does not turn any predictable wellness reward into insurance. IRC §104(a)(3); Treasury Regulation §1.105-1(c)–(e); CCA 201719025.

Eligible premium expenses also require the correct payment mechanism. Health flexible spending arrangements (health FSAs) cannot reimburse medical insurance premiums; health reimbursement arrangements (HRAs) have different rules and cannot be funded through employee salary reduction. A SIMERP label does not establish that an arrangement is either type of plan. A premium already paid with excluded employer contributions or pretax salary reduction cannot simply be repaid to the employee as another tax-free reimbursement. IRS Publication 969, health FSAs; Notice 2002-45, I–IV; Revenue Ruling 2002-3.

Payroll treatment needs its own legal support. The FICA (Social Security and Medicare) and FUTA (federal unemployment) wage exclusions for qualifying medical-expense payments appear in §3121(a)(2) and §3306(b)(2). An income-tax label alone is not a substitute for reviewing the applicable employment-tax and withholding rules.

Follow the expense, amount, and timing

For §105(b) reimbursement, identify the eligible medical care under §213(d), the expense incurred, and the amount available for reimbursement. A screening paid entirely by another plan does not, by itself, support an additional tax-free reimbursement to the employee for that same expense. IRC §213(d); CCA 202323006.

One expense cannot be multiplied by the number of payroll periods. If the eligible unreimbursed expense is $1,200, twelve payments do not create twelve $1,200 expenses. Dividing a claim into installments would still require support under the applicable plan and payment rules; the total excluded as reimbursement cannot exceed the eligible expense. The actual-expense cap is not an installment-payment safe harbor. Treasury Regulation §1.105-2.

Timing and substantiation depend partly on the arrangement. The 2007 proposed cafeteria-plan regulations, on which the IRS expressly permitted reliance pending final regulations, generally treat a medical expense as incurred when care is provided—not when it is billed or paid. They require substantiation before reimbursement and allow reimbursement after the coverage period for expenses incurred during that period. Applicable submission deadlines still need review. Proposed §1.125-6(a)(2), (b)(1)–(4), and preamble.

Notice 2002-45 separately requires each HRA expense submitted for reimbursement to be substantiated. CCA 202317020, a nonprecedential memorandum concerning cafeteria-plan substantiation, rejects shortcuts such as employee self-certification and sampling in the health-FSA situations it examines. These authorities should not be presented as identical administration rules for every insurance product. Notice 2002-45, II; CCA 202317020.

There is an important qualification: the existing final §1.105-2 retains language allowing payments made solely to reimburse actual medical expenses to qualify “without proof” of the actual amount, subject to the actual-expense ceiling. That wording does not create an expense or eliminate applicable cafeteria-plan or HRA substantiation requirements. The broader 2023 proposed amendments to §1.105-2 were not finalized in the 2024 insurance rule; the current regulation still contains the older language. Current §1.105-2; 2024 final-rule preamble, I.E.

An actuarial valuation answers the question it was prepared to address, such as expected costs or coverage value. SIMERPU’s assessment: a valuation alone does not establish an individual’s incurred expense or independently justify cash excluded under §105(b). That conclusion follows from the distinction between the statutory coverage and reimbursement exclusions. IRC §§105(b) and 106(a).

What the IRS memoranda establish

In CCA 202323006, Chief Counsel concluded that the described employer/pretax-funded wellness indemnity payments, without related unreimbursed medical expenses, were income and wages for FICA, FUTA, and federal income-tax withholding. The memorandum is expressly nonprecedential and addresses its stated facts. Its monthly-payment example does not impose a monthly-visit rule. CCA 202323006.

CCA 201703013 also needs context. CCA 201719025, footnote 1, clarified that the earlier memorandum’s situations 2 and 3 assumed no medical expenses were incurred or reimbursed and did not modify Revenue Ruling 69-154. Both memoranda are nonprecedential. They do not support a blanket conclusion that every fixed-indemnity payment is fully taxable, or that every after-tax wellness arrangement is exempt. CCA 201703013; CCA 201719025.

For a closer comparison of the 2023 memorandum’s facts, see SIMERPU’s review of CCA 202323006.

Four hypothetical examples

These examples illustrate the review process. They describe no named provider or actual employer.

Hypothetical 1: One annual reimbursement. An employee submits records for $1,200 of medical expenses incurred during coverage and receives $1,200 in December. Known: the stated expenses, coverage period, and payment. Unknown: eligibility, other reimbursements, any relevant prior-year medical deduction, and satisfaction of claims requirements. Documents needed: the plan, itemized bills or explanations of benefits, coverage records, and claim approval. Annual frequency alone does not defeat the exclusion; those underlying facts determine whether it applies. IRC §105(b).

Hypothetical 2: Monthly payments before a future screening. Payments of $800 begin in January; the screening is scheduled for November. Known: cash precedes the service. Unknown: whether another incurred expense or independently qualifying benefit supports the payments. Documents needed: the payment provision, claims ledger, funding records, and written tax analysis. If the sole basis is reimbursement for the future screening, the earlier payments lack that incurred service expense. Later participation alone does not establish that they qualified when paid. IRC §105(b); proposed §1.125-6(a)(2), (b)(4).

Hypothetical 3: Departure before participation. An employee receives six monthly payments, leaves in June, and never completes the activity. Known: payments occurred and participation did not. Unknown: whether the payments already had a valid basis and whether recovery or payroll corrections are required. Documents needed: participation and termination provisions, claim history, coverage dates, and correction procedures. Departure does not automatically invalidate coverage already provided or otherwise valid reimbursements. But care that never occurred cannot supply the missing §105(b) expense. Continued reimbursement rights depend on the arrangement and its terms; Notice 2002-45, for example, permits specified HRA benefits after termination. IRC §§105 and 106; Notice 2002-45, III.

Hypothetical 4: Ongoing coverage with annual participation. An employer purchases qualifying medical coverage throughout the year and requires one annual assessment for a wellness reward. Known: coverage and a participation condition exist. Unknown: the reward’s form and the basis for any additional cash. Documents needed: the coverage contract, benefit schedule, premium invoices, wellness terms, and cash-payment provisions. No monthly medical visit is needed merely to establish that coverage exists. The coverage exclusion does not automatically extend to cash deposited in the employee’s paycheck. IRC §106(a); Agency FAQ Part XXV, Q2.

Questions to ask before accepting the explanation

• What does “one activity is enough” establish: participation, coverage, benefit eligibility, or tax exclusion?

• What is each payment legally paying for, and which exclusion supports it?

• Who funds the benefit, and are contributions employer-paid, pretax, after-tax, or mixed?

• What expense was incurred, when, and by whom? What remains after other reimbursement?

• Would the same cash be paid if no medical expense existed?

• What supports payments before the activity, and what happens if it never occurs?

• What does the actuarial report value, and what evidence supports the employee’s claim?

• Who verifies eligibility and claims, prevents duplication, informs payroll, and corrects errors?

• Do the plan, elections, insurance contract, administrator agreement, and actual payroll records tell the same story?

Request a written allocation of responsibilities. The plan and contracts should explain employee documentation and participation duties, administrator claim procedures, employer oversight, and payroll reporting. Contracts do not alone determine statutory tax liability: ordinary payroll outsourcing generally leaves the employer responsible, while specified agent and certified PEO arrangements can alter the allocation. IRS guidance on outsourcing payroll and third-party payers.

EDITORIAL PERSPECTIVE

Mardy Gould’s take

I would ask someone to walk me through one employee’s deduction, coverage, expense, claim decision, and payment. A participation calendar answers only part of that question.

Then I would ask for the same explanation when the employee leaves before the annual activity. If the answer changes, show where and why. If it does not, identify the authority supporting the payment in both situations.

That is the conversation I want agents and employers to have before repeating a savings claim.

Frequently asked questions

1. Can a medical reimbursement plan pay only once a year?

Potentially. The annual schedule is not itself the determining factor. Section 105(b) requires qualifying reimbursement of incurred medical expenses. Eligibility, coverage dates, substantiation, other reimbursements, and applicable claims deadlines must support the payment. The proposed cafeteria-plan rules expressly allow actual reimbursement after the coverage period for expenses incurred during that period. IRC §105(b); proposed §1.125-6(a)(2).

2. Must an employee have a medical visit every month to receive a tax-free benefit?

There is no universal monthly-visit requirement in the cited provisions. Qualifying medical coverage can continue without monthly utilization, and eligible insurance premiums can matter without a new encounter. Cash reimbursement, however, needs its own eligible expense or another applicable exclusion; access to services alone does not establish that cash is excluded. IRC §106(a); IRC §213(d)(1)(D); Treasury Regulation §1.105-2.

3. Does paying fixed-indemnity premiums after tax change the answer?

It can. Benefits for injury or sickness under genuine accident or health insurance attributable to after-tax employee premiums may qualify under §104(a)(3), without being limited to actual medical expenses. Pretax and employer funding require a different analysis; mixed funding requires attribution. A small after-tax contribution does not automatically convert predictable wellness cash into qualifying insurance benefits. IRC §104(a)(3); Treasury Regulation §1.105-1(c)–(e); nonprecedential CCA 201719025.

4. What if an employee leaves before completing the annual activity?

Review the basis for payments already made and the plan’s termination, participation, claim, and recovery provisions. Leaving does not automatically invalidate coverage or otherwise valid reimbursements. If payments rested only on reimbursement for care that never occurred, the activity cannot supply an incurred expense. Whether repayment, wage reporting, or payroll correction is required remains fact-dependent. IRC §§105(b) and 106(a); Notice 2002-45, III.

SIMERPU assessment

An annual reimbursement may qualify when it repays eligible, properly supported expenses under the applicable rules. An annual wellness condition may also fit a program providing ongoing qualifying coverage. Neither proposition establishes that monthly cash is tax-free. IRC §§105(b) and 106(a).

For expense reimbursement, the decisive facts are the expense, timing, amount, reimbursement history, and plan operation. For insurance benefits, the policy, covered event, and funding determine which exclusions need evaluation. The authorities support neither a universal monthly medical-visit requirement nor an annual-activity safe harbor. Treasury Regulation §1.105-2; IRC §104(a)(3).

SIMERPU recommends requesting one employee’s complete transaction history, from contributions through coverage, claims, and payments. Include an employee who leaves before completing the activity. Until that record supports the explanation, “one activity per year” is an incomplete answer to why the monthly payment is excluded from taxable wages.