We recently came across a thoughtful and detailed analysis by Chris Vanderwolk, Esq. that examines a category of employee benefit strategies often marketed as FICA tax savings through wellness or indemnity-style plans.

It’s worth your time to read his full piece.

At a high level, these arrangements follow a familiar pattern. Employers are told they can generate meaningful payroll tax savings by introducing a program that provides employees with monthly payments tied, at least in theory, to healthcare or wellness-related activity. The framing is that these payments can be treated as tax-advantaged reimbursements rather than taxable wages.

The issue, as outlined in Chris’ analysis, is that the structure of many of these programs does not appear to align with the underlying tax rules they rely upon. Specifically, reimbursements under §105 are required to be tied to actual medical expenses incurred by the employee. In practice, however, these programs often provide fixed, uniform payments to employees regardless of their individual healthcare utilization.

For employers, the implications are straightforward but important. In the event of a challenge, the liability does not sit with the vendor. It rests with the plan sponsor, who is responsible for payroll tax reporting and compliance. That can mean amended filings, back taxes, and penalties, in addition to administrative complexity.

None of this is to suggest that employers should avoid tax-efficient strategies. Rather, it underscores the importance of understanding how a program works beneath the surface. In benefit design, structure is not a technical detail — it is the foundation of whether a strategy holds up over time.

Debunking Double Dipping
Every generation of the double-dip has a new name. None of them survive scrutiny.

If this wellness tax savings plan your broker is pitching really works, why doesn’t it work at $12,000 a month? Why is the cap always $1,200?

My post on LinkedIn yesterday brought promoters of these plans into my comments, which sent me back through a decade of emails where vendors have explained why their version is different from the ones the IRS kept rejecting. Here’s the list.

Before running through it, two structural features of how these plans actually work.

First, the vendors don’t disclose a §213(d)-grounded methodology for calculating the contribution amount. If the figure were derived from §213(d) expense projections — census data, age and family demographics, expected utilization — that analysis would be the strongest possible defense of the structure, and the vendors would share it. They don’t share it because there isn’t one. The amount came from the opposite direction: what’s the FICA savings number that sells, and what contribution level gets us there without drawing too much scrutiny.

Second, the monthly payment is the same for every employee. Every participant gets the same $1,130 or $1,000 or whatever the fixed amount is. Real §213(d) expenses aren’t uniform. The top 5% of healthcare utilizers consume roughly half of total healthcare spending. A 28-year-old single employee and a 58-year-old with a chronic condition and a family of four do not have the same unreimbursed medical expenses. A plan that genuinely reimburses medical expenses would produce different payment amounts for different employees. A plan that pays the same amount to everyone isn’t reimbursing anything in particular. It’s distributing a flat benefit on a non-medical basis.

Those two features — silent calculation and flat uniformity — are incompatible with a §105(b) reimbursement structure. §105(b) requires the payment to be tied to the employee’s actual incurred medical expenses. The payments here aren’t tied to anything the employee actually incurred. They’re tied to a spreadsheet the vendor doesn’t share or fully articulate.

Which is why the $12,000 question matters. If §1.105-2 really permitted flat tax-free reimbursements untethered to actual expenses, nothing would stop the plans from scaling. Why does the contribution cap sit at $1,200 a month instead of $12,000? Not because of any regulatory ceiling. Because $1,200 produces FICA savings the vendor can sell without producing excess scrutiny. $12,000 would produce ten times the savings, but also jump out to the IRS when §125 deductions hit $144k on a W2. The cap lives in the window where the math works and the scrutiny misses.

Here are the defenses I’ve seen in my inbox over the last decade, and why none of them work.

“Our plan is different because it’s a pre-tax premium reimbursement arrangement.” This was the original 1990s double-dip. Rev. Rul. 2002-3 killed it. §105(b) doesn’t apply to payments that aren’t reimbursing an actual incurred medical expense of the employee.

“Our plan is different because it’s wrapped in a wellness program rather than a premium reimbursement.” CCA 201622031 killed it in 2016. Wrapping the payment in a wellness label doesn’t change whether it reimburses an incurred expense.

“Our plan is different because it’s a fixed indemnity plan, not a self-funded reimbursement.” CCA 201703013 killed it. Fixed indemnity payments also have to clear §105(b).

“Our plan is different because employees make a small after-tax contribution, which makes the payments insurance.” In April 2017, CCA 201719025 addressed this variant and killed it. Nominal after-tax contributions don’t create insurance risk when the payments predictably and massively exceed the contributions.

“Our plan is different because the fixed indemnity coverage is bona fide employer-funded insurance with real wellness services.” CCA 202323006 killed it in May 2023. Real insurance coverage doesn’t cure §105(b)’s actual-expense requirement.

“Our plan is different because it’s a self-insured medical reimbursement plan, or SIMRP, with CPT-coded claims and HRAs. The 2023 CCA was about insured plans.” SIMRPs must satisfy §105(b) like every other §105 plan. The regulation is indifferent to whether the plan is self-insured or insured. CCA 201719025 already addressed the self-funded variant and reached the same conclusion.

“Our plan is different because it’s participation-based, not activity-based.” The regulation asks about conditionality — is the payment conditioned on incurring an expense, or would the employee get paid regardless? Participation-based plans pay regardless. That’s the exact thing §1.105-2’s “irrespective of whether or not he incurs expenses for medical care” language excludes.

“Our plan is different because the payments carry CPT codes.” The factual predicate matters here. In these designs, the provider is typically paid directly by the plan, and the employee bears no out-of-pocket liability for the service that triggers the CPT code. Without employee liability, the CPT code documents services rendered, not an unreimbursed expense of the employee.

“Our plan is different because employees attest monthly to having some medical expense.” Attestation to an unrelated expense doesn’t cure a payment whose entitlement was already set by participation. §105(b) asks whether the payment is for the expense. Coincidence isn’t causation.

“Our plan is different because it’s paired with major medical coverage, making it an integrated §105 plan.” Integration is an ACA market reform concept. It doesn’t answer §105(b). A plan can be properly integrated under the ACA and still produce taxable wellness payments.

“Our plan is different because we have a legal opinion letter from an ERISA attorney.” Private opinions don’t override a Treasury regulation. Procedural prudence under ERISA §404 requires reasonable reliance on qualified counsel — opinion letters from attorneys financially connected to the vendor probably don’t qualify as reasonable reliance.

“Our plan is different because the IRS Chief Counsel memoranda aren’t binding precedent.” §1.105-2 isn’t a CCA. It’s a regulation. The CCAs are the IRS applying the regulation across successive vendor wrappers. A plan sponsor who relies on “CCAs aren’t precedent” is reading the weakest authority in the analysis.

Every version of this product has claimed to be different. Every version has failed the same regulatory test — §1.105-2 requires the payment to be conditioned on an incurred expense, and the vendors’ structures make the payment irrespective of whether any expense exists. The regulation hasn’t changed. The wrappers have.

Read the full text of §1.105-2 carefully. The clause the vendors rely on — that reimbursements can be paid “without proof of the amount of the actual expenses incurred” — has three conditions. The payment must be solely to reimburse the taxpayer. The taxpayer must have incurred expenses for the medical care. And the payment cannot exceed the actual expenses. All three must be true. “Without proof of the amount” is a documentation concession. It is not authority to pay without expenses.

The consequences land on plan sponsors, not vendors. In employment tax audits, the assessed party is the employer. Corrected W-2s, amended 941s, back taxes, interest, penalties. Assessment periods run three years normally under §6501(a), with no assessment period at all for fraudulent returns under §6501(c)(1) or unfiled returns under §6501(c)(3). Every affected employee’s Social Security earnings record is understated. Plan sponsors who continue operating after being shown the §105(b) problem face separate ERISA §404 exposure.

This isn’t about whether these plans should exist. It’s about whether they work under the regulation as written. They don’t.

If you are a plan sponsor in one of these arrangements, the questions to put to your vendor are narrow. Show me the methodology you used to calculate the contribution amount. Show me the authority permitting a flat monthly payment that’s the same for every employee regardless of actual medical expenses. Why can’t we run 100% of payroll through it?

You won’t get answers grounded in §105(b). You’ll get answers grounded in a spreadsheet.

That’s the tell, and it’s been the tell across every iteration of this product.

Sources:

Treas. Reg. §1.105-2: https://www.law.cornell.edu/cfr/text/26/1.105-2

26 U.S.C. §105: https://www.law.cornell.edu/uscode/text/26/105

26 U.S.C. §213(d): https://www.law.cornell.edu/uscode/text/26/213

26 U.S.C. §6501: https://www.law.cornell.edu/uscode/text/26/6501

Rev. Rul. 2002-3: https://www.irs.gov/pub/irs-drop/rr-02-3.pdf

CCA 201622031 (May 2016): https://www.irs.gov/pub/irs-wd/201622031.pdf

CCA 201703013 (January 2017): https://www.irs.gov/pub/irs-wd/201703013.pdf

CCA 201719025 (April 2017): https://www.irs.gov/pub/irs-wd/201719025.pdf

CCA 202323006 (May 2023): https://www.irs.gov/pub/irs-wd/202323006.pdf

IRS Notice 2013-54: https://www.irs.gov/pub/irs-drop/n-13-54.pdf

DOL Technical Release 2013-03: https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/technical-releases/13-03

AHRQ MEPS Statistical Brief #560: https://meps.ahrq.gov/data_files/publications/st560/stat560.shtml

DOJ EDLA press release (September 25, 2025): https://www.justice.gov/usao-edla/pr/new-jersey-man-new-york-man-and-four-corporate-entities-indicted-multi-million-dollar

Find Chris’ original article on Substack: Click Here

The Valhalla advantage

Valhalla Business Advisors is proud to bring boutique services to clients; As a client, details around topics like best practices for employee health promotion activities, updates to overtime rules, and new requirements and standards for businesses can feel complicated; Our team and resources can help you. Feel free to reach out to anyone on Team Valhalla to discuss further!

[We will ask Phil Miles, Esq. to comment on this particular strategy on 7/31, as well!]

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2026 Valhalla Insights Events Calendar

Event Name	Date	Location	Linked In URL for registration	Notes
Healthcare Innovation: Shark Tank	1/22/2026	Penn Stater	This already occurred!	Apos & Tula & Dennis Scanlon
Wellness Strategies: DPC and Employer Clinics	3/27/2026	Toftrees	This already occurred!	Dana Mincer, DO, Zane Gates, MD, Michael Hagen
GLP-1 Update – Happy Valley	5/22/2026	Penn Stater	https://www.linkedin.com/events/7401623386075852800?viewAsMember=true	Janelle Sheen, Pharm. D.
Labor and Employment Update	7/31/2026	Toftrees	https://www.linkedin.com/events/7401630439616192512?viewAsMember=true	Phil Miles, Esq.
Employee Stock Ownership Panel	9/25/2026	Penn Stater	TBD	Panel To Be Announced!