“Double-Dip” health arrangements have always been a controversial topic and a type of scheme that the IRS and/or the Department of Treasury were expected to unequivocally condemn in recent official writings. However, their most recent responses came short of that, causing confusion regarding the legality of Double-Dip arrangements.

Double-Dip health programs most often involve a large pre-tax employee contribution to a seemingly legitimate health plan. The participant would subsequently receive a non-taxable “refund” of all or most of that pre-tax contribution. This means that the participant has paid no taxes on the contribution at any point. This arrangement is often paired with valid tax-preferred benefits (like telehealth or hospital indemnity coverage) alongside the impermissible tax benefits in a mix intended to mask the underlying scheme.

Recent IRS guidance has not been definitive on its condemnation of these types of arrangements. In 26 CFR Part 54, the IRS did not provide any guidance on how to tax contributions to indemnity plans that were made pre-tax. This has led some to believe that the IRS has silently approved certain double-dipping schemes (as an arrangement like this could be seen as a double-dipping scheme that the IRS would normally condemn).

However, this belief is fraught with significant risk. Should the IRS review a “Double-Dipping” program and determine that it violates tax laws, both the employer and the employee would be liable for all accrued back taxes, interest on the unpaid taxes, and a penalty for improper withholding. In addition, employers would face further administrative burden through correcting Forms W-2 and even potential criminal penalties through knowingly implementing an illegal tax scheme. FNA Insurance Services believes that, despite recent advice from some insurance vendors to the contrary, it is important to understand that the laws surrounding “Double-Dipping” have not been changed through recent Department of Treasury or IRS notices. Attempting to implement one of these types of tax arrangements is unlawful and inadvisable.