WELLNESS BY CAPSTONE
The History and Legality of Wellness Plans
Historical Background and Legislative Foundations
Wellness plans have long been supported by tax incentives designed to promote preventive healthcare and employer-sponsored benefits. These plans operate under Sections 105 and 125 of the Internal Revenue Code, both of which provide the legal framework for tax-advantaged health benefits.
Section 105: Enacted in August 1954
Section 105 of the Internal Revenue Code (IRC) permits employers to provide health benefits to employees on a tax-free basis. This provision allows for the reimbursement of medical expenses incurred by employees, fostering a system in which preventive care and wellness initiatives can be encouraged without increasing tax burdens.
Section 125: Enacted in November 1978
Section 125 further strengthened employer-sponsored health plans by allowing employees to make pre-tax contributions toward various benefits, including wellness initiatives. These cafeteria plans provide employees with the flexibility to allocate pre-tax earnings toward health-related expenses, reducing taxable income while promoting access to essential healthcare services.
The Affordable Care Act and Workplace Wellness
The Affordable Care Act (ACA), enacted in May 2010, explicitly acknowledges the importance of wellness initiatives. Notably, on page 509 of the ACA, the legislation emphasizes the expansion of evidence-based prevention and health promotion in the workplace.
A key factor behind this initiative is the acknowledgment that healthcare costs disproportionately accumulate later in life. Statistically, 80% of an individual’s lifetime medical claims arise after age 65, when they transition to Medicare, a taxpayer-funded program. By encouraging wellness initiatives in employer-sponsored plans, the government aimed to reduce long-term healthcare costs and enhance public health outcomes.
Additionally, the government has historically used the tax code to incentivize businesses to take proactive steps toward economic and social objectives. Wellness plans are no different, benefiting from the same legislative intent that has historically driven employer-sponsored benefits.
Regulatory Developments and Compliance Considerations
For years, wellness plans operated with limited regulatory scrutiny. However, as their popularity grew, government agencies began evaluating their compliance with federal tax and healthcare laws.
May 2023: IRS Chief Counsel Advice (CCA) Notice
In May 2023, the IRS issued a Chief Counsel Advice (CCA) notice (IRS CCA 202323006). While this notice raised questions about specific plan structures, it is critical to understand that a CCA does not constitute legal precedent or enforceable law.
https://www.irs.gov/pub/irs-wd/202323006.pdf
Key Points About CCA Notices:
- They are internal IRS guidance documents, not legally binding rulings.
- Courts are not required to follow them.
- Taxpayers cannot rely on them as binding authority.
The issuance of this CCA prompted an open comment period, leading to further regulatory examination and ultimately resulting in three extensions before the issuance of a final tri-agency ruling in April 2024.
April 2024: Tri-Agency Ruling Establishing Legitimacy
In April 2024, the IRS, the Employee Benefits Security Administration, and the Department of Health and Human Services jointly published a ruling addressing the regulatory framework for wellness plans (published in the Federal Register: Short-Term, Limited-Duration Insurance and Independent Noncoordinated Excepted Benefits Coverage).
This ruling:
- Confirmed that wellness plans are exempt under the ACA.
- Set forth final regulations clarifying their operation and compliance requirements.
- Provided authoritative guidance from three leading federal agencies, further solidifying their legal standing.
Employer Responsibilities and Compliance Protections
One of the primary concerns for employers is whether they could face tax liabilities related to employees’ participation in wellness plans. However, standard tax compliance obligations protect employers from individual employee tax responsibilities, provided they:
- Properly withhold and remit federal and state income taxes, Social Security (FICA), and Medicare taxes.
- Issue accurate W-2 or 1099 forms.
- Follow IRS and Department of Labor classification rules for employees and independent contractors.
Addressing Concerns About IRS Clawbacks and Section 125 Risks
A common question regarding wellness plans is whether the IRS could retroactively disallow tax benefits, leading to financial liability for employers. While Capstone provides indemnification against IRS concerns, it is important to recognize that Section 125 clawbacks are not an insurable risk.
Key Considerations:
- Lack of Precedent: No systematic clawbacks have been recorded since the Employee Retirement Income Security Act (ERISA) was enacted in 1974.
- Not Accidental or Unpredictable: Tax disputes arise from regulatory decisions, not unforeseen events.
- Explicit Insurance Exclusions: Tax assessments and regulatory penalties are generally excluded from coverage.
- Regulatory and Business Risk, Not Pure Risk: Insurers cover pure risks, not strategic business decisions or compliance concerns.
- Risk Management Through Compliance: Employers should mitigate risks through proper documentation, legal reviews, and adherence to compliance best practices rather than relying on insurance.
Conclusion: The Established Legality of Wellness Plans
In summary, wellness plans have been legally supported for decades through tax code provisions like Sections 105 and 125. The ACA reinforced the importance of workplace wellness, and the recent tri-agency ruling in April 2024 affirmed their exemption and regulatory framework. While IRS guidance such as CCAs may raise questions, they do not establish legal precedent, and no history of regulatory action has invalidated these plans.
Employers can confidently offer wellness plans as a compliant and legally sound component of their benefits strategy, ensuring they adhere to established tax and labor laws while benefiting from government-supported health initiatives.
Rebuttals to Commonly Cited Articles and Website URL’s BDO Response
The article referenced doesn’t say you can’t utilize plans like Capstone Plus—it simply cautions employers to be mindful of certain programs that misrepresent what qualifies as a legitimate medical expense. And that’s an important distinction to make. It’s not a blanket rejection of these plans; it’s a warning against those that cross the line.
Let’s be clear: Capstone Plus operates on a completely different framework, one that is firmly grounded in legal and regulatory compliance. What we’re offering is not about pushing personal wellness expenses as tax-free benefits. Our focus is on enhancing the overall health of employees through virtual primary care, mental health services, and preventive care that directly align with bona fide medical expenses under IRC Section 213(d). These are real medical services, not vague wellness perks.
The program is designed to reduce taxable income for both employers and employees in a compliant, transparent manner.
The IRS rightly points out issues with programs that misrepresent wellness expenses, but this doesn’t apply to us. We are not making vague promises of tax savings based on personal activities like gym memberships or nutrition counseling. Our core offerings—virtual medical care, telemedicine, and preventive services.
Now, it’s essential to recognize why companies like BDO cannot unilaterally endorse every program out there. Their responsibility lies in evaluating a wide range of programs, ensuring they meet rigorous legal and financial standards. Each company has its own set of compliance measures, and programs that may be perfectly legitimate and compliant for some employers might not be suitable for others due to specific circumstances or risk tolerance. BDO must exercise caution because blanket endorsements could open the door to unforeseen liabilities or misalign with their clients’ unique needs.
That’s exactly why Capstone Plus stands out. We’ve carefully structured our offering to remain fully compliant with Section 213(d) and designed it to work within the tax code. The program offers tangible benefits that are both legal and highly effective for the right employer. The caution issued by the IRS doesn’t apply to solutions that adhere to the law, and it certainly doesn’t negate the value we bring.
The real problem arises when wellness programs are marketed with an overreach, promising things they can’t deliver. But Capstone Plus is designed to work within the system, not around it. This is about revolutionizing how we think about employee health, doing it ethically, and ensuring compliance at every step.
This is what separates innovation from misrepresentation. Let’s stay focused on the facts and the value we truly provide.
AFLAC Response
https://www.aflac.com/business/resources/advisories/wellness-scam-advisory.aspx
The conversation around the taxation of fixed-indemnity benefits has been around for decades, and yet, these discussions seem to circle back to the same points, often confusing employers and individuals alike. What’s truly important to understand is that nothing fundamentally has changed.
First, let’s address the memo circulating about health and wellness programs. This document, written by a law firm, contains several inconsistencies. Ironically, while they are quick to question the compliance of such programs, the same memo goes on to acknowledge that there are compliant health and wellness plans. More importantly, at the very bottom of the document, they include a crucial disclaimer that it “does not constitute legal advice.” So, while it’s written by attorneys, it’s not something that carries legal weight. Anyone reviewing this memo needs to keep that in mind.
Now, regarding Capstone Plus: our claim payment process is simple and straightforward. When a participants claim is processed, and we make the payment directly to the individual based on the covered services, just like many other well-known companies in the industry including Aflac. And just like Aflac, we do not issue a 1099 for claim payments unless requested by the participant. This aligns with industry standards, particularly in cases where claims can range significantly in size. It’s similar to a participant receiving a large critical illness payment, that in my cases exceed $10,000—those who want to self-report or request a 1099 have the option to do so.
Where things really break down is when you examine organizations operating under a 1099 salesforce structure. With independent contractors responsible for messaging and selling, it’s incredibly difficult to maintain control over how health and wellness programs are presented. There’s often a lack of consistency, which can lead to confusion, misrepresentation, and—ultimately—compliance issues. We’ve all seen the consequences of that and we certainly understand how challenging it could be for that organization to offer a health and wellness program, similar to Capstone Plus.
By contrast, Capstone Plus has established a rigorous communication and compliance process. We take every step to ensure that both the claims process and the overall program follow all guidelines set forth by the IRS and the American Medical Association. Everything we do is built on a foundation of transparency and compliance, which protects not just us, but our clients as well.
In other words, if health and wellness programs like ours weren’t compliant, regulatory agencies would have taken action by now. The recent Tri-Agency agreement from earlier this year is a clear example of this—it supersedes any outdated memos and further affirms that compliant health and wellness programs, like Capstone Plus, are fully within the bounds of current regulations.
Let’s not get lost in the weeds—the path forward is clear, and both our approach and Aflac’s are compliant and rooted in decades of regulatory consistency.
RSM Response
https://rsmus.com/insights/tax-alerts/2023/wellness-plan-schemes-.html
Capstone Plus is not just another wellness plan claiming to dance around tax regulations. It’s a forward-thinking insurance product, steeped in compliance and designed to genuinely benefit both employees and employers. I understand that recent IRS memos and articles have painted a broad, skeptical picture of wellness plans that offer too-good-to-be-true tax benefits.
Capstone Plus is an indemnity product that follows the rules, embracing rigorous compliance frameworks to provide real value. This is not a tax strategy masquerading as an insurance plan. Capstone Plus enhances the workplace experience by giving employees access to premium virtual medical care, mental health support, and essential prescription medications—all through Amaze Health’s five-star-rated services. It creates tangible, meaningful health benefits that do not hinge on tax loopholes or questionable reimbursements.
It’s no secret that the IRS is paying close attention to wellness plans with practices that blur the lines. We’re aware of the May 2023 memorandum, the proposed regulations of July 2023, and the April 2024 reiteration that reinforced the IRS’s concern about plans circumventing employment taxes. The language may be cautionary, but the misinterpretation of these memos has created an environment ripe for misunderstanding.
Capstone Plus operates within established insurance guidelines, offering real, structured benefits tied to the well-being of employees—not superficial health checklists that result in untaxed cash handouts. This isn’t a scheme, and it’s not a loophole. It’s a legitimate indemnity insurance solution that brings genuine improvements to the lives of employees and measurable savings to employers.
Clients, affiliates, and brokers, I encourage you to take a moment and see beyond the fear-mongering that surrounds our industry. Capstone Plus isn’t just another wellness plan trying to exploit a tax benefit; it’s the future of employee care, built on a foundation of compliance, innovation, and genuine value. And that’s something worth standing up for. Let’s stay true to what we know, be proactive in our conversations, and remind the world that there are still solutions designed not to skirt the system, but to elevate it.
Groom – Taxation of Benefits
Indemnity benefits can be taxable, and we have never stated otherwise. Like other indemnity carriers, we do not issue a 1099 for claims. For example, if a competitor’s Critical Illness policy pays $30,000 to a claimant, that carrier also chooses not to send a 1099. Employers are not required to report these claims on a 1099 or W-2.
Currently, there is no established mechanism to report these benefits as taxable, and this issue has existed for many decades with other indemnity-based plans. Additionally, an employee’s tax obligations and personal financial situation are their responsibility to manage. This is why we emphasize education and provide employees with access to a CPA hotline for any questions they may have.
In addition, we wanted to provide an outline on recent rulings for your review.
Tri-Agency Ruling Overview:
On March 28, 2024, the Departments of Labor, Treasury, and Health and Human Services (the “Tri-Agencies”) issued final regulations on short-term, limited-duration insurance (STLDI), hospital and other fixed indemnity insurance (Fixed Indemnity), and the taxation of accident and health plan benefits (the “Final Rule”). The Final Rule’s STLDI provisions align closely with the proposed regulations issued on July 7, 2023 (the “Proposed Rule”). However, the Tri-Agencies did not finalize most of the Proposed Rule’s new requirements for Fixed Indemnity to be an excepted benefit and did not implement any taxation changes under Code section 105(b).
Preamble from Ruling:
The IRS acknowledges the need for further review and intends to address concerns raised by commenters in future guidance.
Fixed Indemnity Information from Ruling:
The Final Rule introduces new notice requirements for Fixed Indemnity coverage in the group market to qualify as an excepted benefit. For group coverage, insurers must display the notice prominently on the first page of any marketing, application, and enrollment materials, in at least 14-point font. The goal is to ensure consumers understand that Fixed Indemnity is not a replacement for comprehensive health coverage. These notice requirements were set to take effect on January 1, 2025.
However, on December 6, 2024, the U.S. District Court for the Eastern District of Texas ruled against these requirements in a case brought by ManhattanLife Insurance & Annuity Company. The court vacated the rule, finding that the agencies exceeded their statutory authority by mandating the notice. As a result, the requirement was overturned.
The Final Rule did not adopt other proposed changes, such as restricting Fixed Indemnity benefits to a per-period basis or prohibiting payments based on services received, incurred expenses, or severity of illness.
Change in Law:
There is no precedent for retroactively applying healthcare laws in the United States. Employers do not need to be concerned about sudden regulatory shifts, as any future changes will require a reasonable transition period. As long as indemnity plans comply with current regulations, including the now-overturned notice requirement, they remain in compliance.
Greenbook:
The IRS has historically acknowledged its limitations in unilaterally redefining the taxation of Fixed Indemnity benefits. The Treasury’s 2022 Green Book proposed clarifying that only payments for “medical expenses” (not “medical events”) should be excluded from taxable income. However, the IRS explicitly asked Congress to legislate this change, signaling that such a shift requires legislative approval rather than agency rulemaking. This reinforces the position that federal agencies lack the authority to rewrite fundamental aspects of insurance and tax law on their own.
Repeal of Chevron Doctrine and Its Impact on IRS Authority
The repeal of the Chevron doctrine fundamentally reshapes the authority of federal agencies, making it significantly harder for agencies like the IRS to unilaterally change laws regarding Fixed Indemnity insurance—or any other regulated industry.
The Chevron doctrine, established in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc. (1984), granted federal agencies broad deference in interpreting ambiguous statutes. If a law passed by Congress contained vague or unclear language, courts generally deferred to the agency’s interpretation, as long as it was “reasonable.” This allowed agencies like the IRS, Department of Labor, and HHS to expand their regulatory authority without explicit congressional approval.
However, with the Supreme Court’s decision to limit or repeal Chevron deference, agencies now face a higher legal burden when attempting to interpret and enforce regulations. Specifically, courts are no longer required to automatically accept an agency’s interpretation of an ambiguous law. Instead, judges will independently review the statute’s text and determine whether the agency’s action is justified.
Why This Matters for Fixed Indemnity Insurance and IRS Rulemaking
The repeal of Chevron deference significantly restricts the ability of agencies like the IRS to unilaterally change laws regarding Fixed Indemnity insurance. Any attempt to impose new taxation rules or redefine how Fixed Indemnity is regulated must now be explicitly authorized by Congress. This shift ensures that major regulatory decisions affecting employers, insurers, and consumers are made through the legislative process rather than bureaucratic rulemaking.