The IRS is once again seeing a familiar problem, and practitioners should be ready to spot it. A senior agency official recently warned that promoters are reviving the "double dip" wellness plan arrangements that first surfaced after the Affordable Care Act, marketing them as a way for employers to trim employment taxes. The agency's message was direct. These structures do not hold up.
Kevin Knopf of the IRS Office of Associate Chief Counsel told attendees at a recent Federal Bar Association seminar that anyone pitching a plan promising big payroll tax savings is selling something that fails on its own terms. As he put it, none of these arrangements work on paper.
How the scheme works
The setup usually begins with employees paying for wellness plan coverage through pretax salary reductions under a section 125 cafeteria plan. They then receive reimbursements tied to participating in the plan. Promoters claim those reimbursements are tax-free medical payments. The problem is that the premiums were already excluded from income through the salary reduction, so the same dollars are benefiting the employee twice. Take-home pay stays roughly the same, while the employer claims to generate payroll tax savings.
The IRS calls this double-dipping. Knopf noted that promoters often do not even follow their own plan terms. Instead of routing money to an insurer and back, the supposed rewards are sometimes paid straight through payroll.
Why this matters for your firm and your clients
This warning carries two layers of risk. First, your clients may be approached by a vendor promising guaranteed savings, and they will look to you for a reaction. Second, you run a small business too. The same pitch can land in your own inbox, and the same exposure applies if you adopt it. If a plan promises to lower payroll taxes without changing what employees actually receive, treat it as a red flag rather than an opportunity.
Compliant ways to support employee benefits
The good news is that genuine, well-documented options exist for rewarding employees without inviting an audit. Health savings accounts paired with a qualified high-deductible health plan offer real tax advantages for both the employer and the worker. A properly run section 125 cafeteria plan can let employees pay for legitimate benefits with pretax dollars, provided the plan operates according to its terms. Health flexible spending accounts and dependent care assistance programs serve similar purposes when administered correctly.
Smaller employers should also look at the qualified small employer health reimbursement arrangement, which lets firms with fewer than 50 employees reimburse premiums and medical costs within defined limits. Retirement vehicles such as a SIMPLE IRA, a SEP IRA, or a safe harbor 401(k) deliver durable tax benefits and strengthen retention.
How to avoid creating a problem by accident
The line between a smart benefit and a compliance issue often comes down to substance and documentation. Watch for any arrangement that produces a tax benefit without a corresponding economic reality. Make sure reimbursements actually flow through the plan rather than through payroll. Confirm that any amount excluded from income is not also reimbursed tax-free. Keep written plan documents current and follow them in practice. When a benefit looks too clever, it usually is.
If a client or vendor presents a plan you cannot fully explain, slow down and document your concerns. That healthy skepticism protects both your clients and your own practice.
Dr. Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
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