A benefits proposal can offer valuable care and still leave a difficult question unanswered: why is the cash paid to employees excluded from wages?

That question deserves attention before an employer relies on projected payroll savings. It also deserves an answer precise enough to distinguish insurance, medical reimbursement, and wellness rewards.

In “FICA Wellness & SIMERP: Tax Savings vs. Compliance Risk,” published August 10, 2026, OneDigital authors Samantha Malovrh and Jesse Hansen warn about arrangements that combine pretax contributions with purportedly tax-free wellness or indemnity payments.

Their position includes an important qualification: legitimate supplemental insurance and properly designed wellness benefits can serve employers and employees. They recommend scrutiny of the structure, rather than abandoning every such benefit.

SIMERPU’s assessment starts there. The useful response is to identify which facts support an exclusion, which facts undermine it, and what employers should obtain before accepting the calculation.

Start by identifying what the employee receives

Four different benefits can appear in one proposal.

Health coverage

Provides access to benefits under an accident or health plan. Section 106(a) generally excludes qualifying employer-provided coverage from employee income. Coverage can have value even when an employee makes no claim that month.

Medical expense reimbursement

Pays or reimburses expenses incurred for qualifying care. Section 105(b) supplies an exclusion for qualifying reimbursements; Section 213(d) defines medical care. The inquiry includes the actual obligation and what other coverage has paid.

Fixed indemnity insurance

Pays a scheduled amount upon a covered event, rather than calculating the benefit from the medical bill. Its funding and terms matter to taxation. Separate exclusions, including the narrow permanent-injury provision in Section 105(c), require their own analysis.

Wellness cash rewards

Compensate participation in an activity. Using a medical service can trigger a reward without making the reward a reimbursement of that service.

These distinctions explain why proof that a program provides useful healthcare does not, by itself, resolve the treatment of additional cash.

Where OneDigital’s warning is supported

CCA 202323006, dated May 9, 2023, and released June 9, examines an insured wellness arrangement funded through $1,200 monthly pretax salary reductions. Certain activities triggered a $1,000 benefit, limited to one payment monthly.

Some triggering care was free to employees or covered elsewhere. Benefits passed through employer payroll.

Chief Counsel concluded that the described payments, without related unreimbursed medical expenses, were income and wages for FICA, FUTA, and federal income-tax withholding. FICA finances Social Security and Medicare; FUTA is federal unemployment tax.

That analysis supports a central concern: an activity record cannot substitute for an expense when the claimed exclusion depends on reimbursement.

CCA 201622031 similarly distinguishes qualifying medical services from cash participation rewards. One component’s favorable treatment does not automatically extend to the other.

OneDigital refers generally to IRS memoranda without identifying them. These are independently identified authorities relevant to its concerns, rather than sources the article expressly names.

Funding changes the question

A cafeteria plan lets employees choose between cash compensation and qualified benefits under Section 125. Proper elections can preserve the exclusion for qualifying coverage.

For the accident-and-health benefit analysis, pretax salary reductions are treated as employer contributions. They are different from employees purchasing coverage with wages already included in taxable income.

Under Section 104(a)(3), qualifying insurance benefits attributable to employee after-tax funding can receive different treatment from employer-funded benefits. This assumes genuine accident or health insurance benefits for personal injury or sickness, attributable to employee after-tax contributions. An arbitrary activity reward does not acquire that character merely because a payroll deduction is after tax.

Mixed funding requires allocation. Treasury Regulation §1.105-1(c)–(e) provides different attribution methods for insured and noninsured arrangements. A small after-tax deduction does not establish that all benefits are employee-funded.

The reimbursement component also needs classification. Notice 2002-45 specifies that a health reimbursement arrangement (HRA) is employer-funded rather than salary-reduction funded and examines indirect financing. Not every self-insured medical reimbursement plan is an HRA; the actual design determines which rules apply.

A service’s value is different from an incurred expense

Consider a hypothetical consultation included in a monthly benefit package. The provider says it ordinarily sells for $300, but the employee owes no additional charge.

The consultation may provide real medical value. Assume the employee incurs no separate obligation for the consultation. SIMERPU’s evidentiary conclusion is that its advertised price alone does not establish a $300 expense available for an additional cash reimbursement.

The review should identify the contractual obligation, actual charge, responsible party, and payment. An actuarial valuation may help explain pricing or expected utilization; it does not independently document a particular employee’s medical liability.

“Incurred” also does not always mean the employee must pay first. Treasury Regulation §1.105-2 recognizes indirect payment discharging an obligation for medical care.

The distinction is between an actual obligation satisfied through the plan and a hypothetical retail price assigned to an included service.

Nor can an already-excluded premium simply become a second reimbursable employee expense. In Revenue Ruling 2002-3, the IRS rejected excluding additional payments purportedly reimbursing premiums already funded through salary reduction.

The $30 expense and $200 payment need context

OneDigital illustrates a $200 fixed indemnity benefit against $30 of unreimbursed medical expenses, with $30 potentially excluded and $170 taxable under employer or pretax funding.

That gross-income comparison appears in CCA 201719025, pages 8–9: pretax cafeteria-plan funding, a $200 payment for a medical office visit, and $30 of related unreimbursed costs. Its contrasting after-tax example assumes genuine insurance covering unpredictable health events and excludes the entire $200.

A published authority also matters. In Revenue Ruling 69-154, situation 2, employer-paid policies provide $1,200 against $900 of medical expenses. The policies pay $700 and $500 for the same illness; the employee incurred and paid $900. The ruling includes the $300 excess in gross income. These are the ruling’s facts, not a payroll-tax calculation or evidence that unrelated bills can support a wellness reward.

CCA 201719025, page 5 and footnote 1, expressly preserves that ruling’s analysis and explains that specified earlier advice concerned situations without medical expenses incurred or reimbursed. That specific clarification must accompany discussion of the broad adverse language in CCA 201703013; treating the earlier advice as categorically rejecting every exclusion up to actual expenses would overstate it.

Nevertheless, the $30/$200 calculation should not become a universal formula. The payment’s terms, funding, related expenses, and other reimbursements remain essential.

The July 12, 2023 proposed-rule preamble, section IV.A and footnote 215 states the agencies’ interpretation that expense-independent benefits fail the exclusion altogether. It also cautions against extending Revenue Ruling 69-154 beyond its multiple-coverage facts.

The proposed tax amendments were not finalized in the April 3, 2024 final rule’s tax-treatment discussion. The agencies said existing compliance efforts would continue and cautioned against inferring agreement with commenters from that decision.

The current regulation checked for this review retains its longstanding wording. The proposed amendment is not final law; the preamble nevertheless documents an agency interpretation employers should address. Neither the proposal nor its nonfinalization settles every disputed application.

Substantiation must connect the payment to the expense

Substantiation means evidence supporting the claim.

Revenue Ruling 2003-43 describes documentation and electronic methods for health flexible spending arrangements (FSAs) and health reimbursement arrangements (HRAs). Evidence includes the care provided, date, amount, and participant responsibility. Permitted automatic methods can establish certain claims without requesting a new receipt each time.

The current §1.105-2 also contains language allowing certain payments made solely to reimburse actual expenses without proof of their amount. That language is not a universal waiver of the operational requirements applicable to a particular plan.

CCA 202317020 rejects self-certification and several substantiation shortcuts in cafeteria-plan health FSAs. The 2007 cafeteria-plan proposals permit taxpayer reliance pending final regulations. That reliance provision should be distinguished from final regulatory status; the CCA itself is nonprecedential.

Duplicate reimbursement is another separate check. Documents should establish what insurance, another reimbursement plan, or another source has already paid. A benefit administrator needs enough information to determine the amount remaining eligible under the applicable rules.

Labels and integration have limited jobs

“Participatory” describes a category under wellness nondiscrimination rules. It does not provide an independent tax exclusion for cash.

“Self-insured” describes financing. “SIMERP” does not establish a uniform set of benefit terms. Neither description proves that a particular payment meets Section 105(b).

Proper integration with other group medical coverage can address specified ACA requirements for applicable reimbursement or account-based plans. The relevant method may require actual enrollment, reimbursement restrictions, minimum-value coverage, and opt-out rights.

Integration does not create an expense or resolve its tax treatment. Merely offering another medical plan does not demonstrate that the conditions are satisfied.

ERISA plan information and disclosures, COBRA continuation, health FSA requirements, and cafeteria-plan operation also require review where applicable. Employer type, workforce size, coverage terms, and plan classification determine applicability; these requirements do not all attach automatically to every component.

Payroll is a separate part of the review

Income exclusion, FICA, FUTA, and withholding involve distinct rules, including Sections 3121, 3306, 3401, and 3402. The analysis should identify each applicable exception and who must administer it.

Employers should obtain written instructions addressing the actual payment pathway, including insurer or administrator involvement. A service agreement assigning responsibility does not itself establish that the benefit is excluded.

The 2026 W-2 instructions generally require taxable fringe compensation in box 1 and, where applicable, Social Security and Medicare wage boxes. An informational entry cannot replace required wage reporting.

For 2026, former box 14—Other is box 14a. That administrative change does not determine whether a payment qualifies for exclusion.

What employers should request before relying on savings

Ask the provider and independent advisers to connect these documents and answers:

1. Governing terms: Obtain the insurance policies, reimbursement plan, cafeteria plan, elections, service agreements, and employee disclosures. What legally triggers each payment?
2. Funding records: Identify employer, pretax, and after-tax contributions. How are mixed-funded benefits allocated?
3. Claim evidence: Request an anonymized example showing the medical obligation, service date, charge, other payments, and approved amount.
4. A no-expense example: What happens when the employee completes an activity but owes nothing? What authority supports the resulting treatment?
5. Duplicate-payment controls: How does the administrator identify amounts paid or reimbursable elsewhere under the applicable rules?
6. Benefits classification: What establishes any claimed integration or exemption? Which ERISA, COBRA, wellness, and FSA requirements apply?
7. Payroll and corrections: Who determines treatment, communicates taxable amounts, handles filings, and corrects errors?

A legal opinion should be read for its assumptions and whether operations match them. Insurance or audit protection may address specified risks; neither guarantees the claimed tax treatment or constitutes government approval.

SIMERPU’s Assessment

OneDigital identifies a substantial concern: projected savings can fail when they depend on excluding cash that does not satisfy the claimed exclusion.

The analysis becomes more useful when it separately evaluates coverage, qualifying reimbursement, genuine insurance benefits, and participation rewards. Published guidance recognizes legitimate exclusions and also identifies arrangements that fail them.

Chief Counsel Advice is nonprecedential under Section 6110(k)(3). It remains useful evidence of IRS reasoning, but should not be presented as universal approval or prohibition.

SIMERPU recommends testing the proposed exclusion against actual documents, claims, funding, and payroll instructions. A complete document package enables review; it does not predetermine the result.

Mardy Gould’s Take

Employers deserve a clear explanation of what employees receive, how the program works, and why each payment is treated the way it is.

I want this conversation to produce better questions and better documentation. Useful care matters. So does showing the evidence behind the projected savings.

A provider should be able to walk an employer through the funding, a real claim, a situation with no reimbursable expense, and the payroll instructions. Where the answer is uncertain, that uncertainty should be stated clearly.

Transparency gives employers and their advisers a stronger basis for deciding what belongs in their benefits strategy.

This article reviews published sources and does not evaluate or approve any named provider’s program. Credit to OneDigital does not imply its endorsement of this response.

Continue the review: Visit SIMERPU’s research library and analysis of CCA 202323006. SIMERPU’s summaries are educational commentary; use the linked original authorities for the underlying rules.

Educational analysis, not legal or tax advice or approval of any program. Obtain independent advice addressing actual plan documents and operations. Research cutoff: November 2, 2026.