A wellness policy can pay an employee $1,000 even when the activity that triggers it leaves no medical expense to reimburse. That is the problem examined in IRS CCA 202323006.
The IRS Office of Chief Counsel memorandum, issued by Laura Warshawsky and Lynne Camillo, was dated May 9, 2023, and released June 9. It considered an insured fixed-indemnity wellness policy: coverage paying specified cash benefits for qualifying events.
Employees funded $1,200 monthly premiums through a Section 125 pretax salary reduction. Certain wellness activities triggered $1,000, at most once monthly, including activities covered without employee cost. The insurer sent the wellness benefits 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 covers Social Security and Medicare; FUTA is federal unemployment tax.
The advice is expressly nonprecedential. It does not decide every arrangement marketed as a SIMERP, WIMPER, or preventive care management program. Our SIMERPU research entry for CCA 202323006 provides the source recap and context.
For anyone evaluating a different proposal, the next question is specific: which documented difference changes the applicable tax analysis?
A pretax premium does not establish a tax-free payment
Three provisions answer different questions. Section 125 addresses qualifying choices between cash and benefits. Section 106 generally excludes qualifying employer-provided accident or health coverage. Section 105 governs certain payments, including the exclusion for qualifying medical-expense reimbursements.
Although the reduction comes from an employee’s salary, pretax salary reduction is treated as an employer contribution for this analysis. It is not equivalent to purchasing insurance with after-tax wages.
That distinction also matters when a proposal describes cash as repayment of the premium. In Revenue Ruling 2002-3, the IRS rejected excluding repayments of already-excluded employer premiums, including those funded through salary reduction.
Coverage can have value without a claim that month. Its tax treatment still does not answer the separate question about cash returned to the employee.
Which program differences deserve closer examination?
Use the comparison below to identify evidence—not to award a program a compliance label.
Claimed difference | Evidence to examine | What the difference could establish |
|---|---|---|
The insurance is funded after tax. | Elections, payroll records, and attribution of benefits to the actual funding sources. | Section 104(a)(3) can exclude qualifying accident or health insurance benefits for injury or sickness attributable to employee after-tax contributions. Funding alone does not turn any wellness reward into such a benefit. |
The payment reimburses medical care. | The incurred obligation, care meeting Section 213(d), other reimbursements, and the payment terms. | A basis to evaluate the Section 105(b) reimbursement exclusion. Participation records alone do not establish the expense. |
The plan is self-insured. | Who bears the risk and how claims are funded and paid. | A structural distinction, but not an automatic tax distinction: Section 105(e) brings employee accident or health plans into the framework. |
The program has an actuarial valuation. | What was valued, the assumptions, and its connection to the employee’s payment. | Potential support for pricing or valuation. As an evidentiary matter, a valuation alone does not document an employee’s incurred expense or establish an exclusion. |
Legitimate medical reimbursement remains part of this framework. IRS Publication 15 (2026) explains that qualifying medical-care reimbursements under an employer’s self-insured plan generally are not wages. That explanation is not approval of a particular seller or payment method.
Why actual expenses change the comparison
A zero-expense example cannot settle every case involving real medical expenses.
In Revenue Ruling 69-154, situation 2, two employer-paid policies provide $700 and $500 for one illness against $900 of medical expenses. The IRS identifies the $300 excess as includible in gross income. These are the ruling’s figures, not hypothetical savings or a current client result.
This supports a narrower conclusion than saying all employer-funded insurance benefits are fully taxable. It does not establish that any fixed reward becomes reimbursement whenever an employee has unrelated medical bills. Nor does this income-tax example, standing alone, resolve payroll treatment for every arrangement.
CCA 201719025, page 5 and footnote 1, acknowledges the ruling and says earlier advice should not be read to change its analysis or result. That CCA is also nonprecedential.
The current Treasury Regulation §1.105-2 contains another qualification: certain payments made solely to reimburse actual medical expenses can qualify even without proof of the amount, but not above the actual expense. That sentence does not resolve every plan’s separate substantiation requirements.
The same regulation recognizes indirect payment discharging an incurred medical obligation. An employee therefore need not always pay the provider personally first. The review should identify the obligation, who satisfied it, and whether the payment actually reimburses qualifying care.
What changed after the 2023 memo?
The July 12, 2023 proposal would have amended §1.105-2 to address payments made without regard to medical-expense amounts and plan substantiation. Those proposed tax amendments were not finalized in the April 3, 2024 final rule.
The agencies cautioned against inferring agreement with commenters from that decision and said existing tax compliance efforts would continue. The current eCFR text checked for this article retains the existing wording. SIMERPU’s discussion of the unfinished rule provides further context.
A separate court development concerned insurance notices. The December 4, 2024 ManhattanLife judgment vacated the challenged notice provisions; the government’s appeal was dismissed June 10, 2025, at its request. Those orders did not decide whether wellness payments qualify under Section 105(b).
SIMERPU’s perspective
The sound educational conclusion is to separate three issues: the coverage purchased, the funding’s tax treatment, and the legal basis for the payment.
A different funding source or genuine reimbursement obligation can matter. A new acronym or valuation does not demonstrate those facts. The strongest comparison connects governing terms to a claim decision and the resulting payroll entry.
Evidence that could change an assessment includes records establishing different funding, qualifying incurred expenses, or a different entitlement supported by the applicable authority. If the documents do not establish that connection, the proposed exclusion remains unverified. Completing a document request enables professional review; it does not decide the outcome.
Mardy Gould’s take
I would ask for two examples: one where the employee has a qualifying expense and one where the employee does not.
Then I would compare the plan language, claim decision, and payroll instructions. Does the payment change? If it does not, what authority supports excluding it in both situations?
I would also want to know what an actuarial report establishes—and what it leaves for the administrator to verify. A provider should be able to explain that boundary without expecting an employer to fill in the blanks.
Five questions to bring to the review
How is each component funded? Obtain the elections and payroll records showing pretax, after-tax, and employer contributions.
What makes this payment excludable? Identify the precise authority and its factual requirements.
If reimbursement is claimed, what expense supports it? Identify the care, incurred obligation, other coverage, and any prior reimbursement.
What happens with no expense—or an expense below the scheduled benefit? Ask for the governing provision and an example of its application.
Who determines and communicates the payroll treatment? Document responsibility for review, reporting instructions, and corrections.
SIMERPU’s provider compliance questions can help organize the request.
Next step: Use the Case Brief worksheet in the free SIMERPU Professional Roadmap, available without registration. Record the proposed structure, missing evidence, and who will answer each question before the employer relies on projected tax treatment.
Educational analysis, not legal or tax advice or approval of any program. Employers should obtain independent advice about their actual documents and operations. Research checked through October 31, 2026.
Sources
IRS CCA 202323006 — original advice and stated facts.
IRC §105 and Treas. Reg. §1.105-2 — governing reimbursement framework.
Rev. Rul. 2002-3 — repayment of excluded premiums.
Rev. Rul. 69-154 and CCA 201719025 — excess indemnification and important qualifications.
2023 proposal and 2024 final-rule preamble, section I.E — proposed versus operative rules.
ManhattanLife judgment and appeal dismissal — insurance-notice litigation.
ABOUT THE AUTHOR
Co-Founder, SIMERPU
Mardy Gould is Co-Founder of SIMERPU. He writes about SIMERP arrangements, employer questions, industry developments, and the practical work behind employee benefits. His focus is helping professionals understand what they represent, examine the evidence, and own the follow-through.
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