How This Structure Addresses Every IRS Concern
The IRS has expressed specific concerns about wellness programs in various Chief Counsel Advice memoranda. The dual-premium structure addresses each concern directly:
| IRS Concern | Source | How Dual-Premium Addresses It |
|---|---|---|
| Double Dip: Pre-tax premiums + tax-free benefits from same policy | CCA 202323006 | ✓ Two separate policies. Pre-tax funds Policy 1. After-tax funds Policy 2. |
| Premium Reimbursement: Employer reimburses employee-paid premiums | CCA 201622031 | ✓ No reimbursement. Wellness benefit is an insurance payment, not a premium return. |
| Excess Benefits: Benefits exceed actual medical expenses | CCA 201703013 | ✓ Wellness benefits under §104(a)(3) are not limited to medical expenses when funded after-tax. |
| Lack of Insurance Risk: Self-funded arrangements without risk transfer | CCA 201719025 | ✓ Both policies are fully insured by licensed carriers bearing actuarial risk. |
| Employer Attribution: Benefits attributed to employer contribution | Treas. Reg. §1.104-1(d) | ✓ Wellness policy premiums paid with after-tax employee dollars, not employer funds. |
The foundation of the dual-premium structure is IRC §104(a)(3), which provides:
"Gross income does not include amounts received through accident or health insurance (or through an arrangement having the effect of accident or health insurance) for personal injuries or sickness."
— IRC §104(a)(3)
This exclusion applies when premiums are paid with after-tax dollars. Treasury Regulation §1.104-1(d) confirms:
"If an individual purchases a policy of accident or health insurance out of the individual's own funds, amounts received thereunder for personal injuries or sickness are excludable from gross income under section 104(a)(3)."
— Treas. Reg. §1.104-1(d)
Chief Counsel Advice memoranda, including CCA 202323006, are explicitly non-precedential:
"Written determinations... may not be used or cited as precedent."
— IRC §6110(k)(3)
This means CCAs:
Treasury Regulations, Revenue Rulings, Revenue Procedures, and court decisions carry precedential weight. The dual-premium structure relies on IRC §104(a)(3), Treasury Regulation §1.104-1(d), and Revenue Ruling 69-154—all of which have been established law for decades.
Proper documentation is essential for demonstrating compliance. A well-structured dual-premium program should maintain:
Certain structures create compliance risk. Avoid programs that:
When evaluating dual-premium program vendors, confirm:
| Criteria | What to Look For |
|---|---|
| Insurance Carriers | Licensed in your state; rated by AM Best, Demotech, or similar; genuine risk transfer |
| Legal Opinion | Written tax opinion from qualified ERISA/tax counsel addressing §104(a)(3) treatment |
| Premium Separation | Clear documentation of separate pre-tax and after-tax premium streams |
| Compliance Protection | Insurance covering defense costs, penalties, and potential back taxes |
| Track Record | Years in operation; no adverse IRS rulings; references from similarly-sized employers |
The PTE Gold Book provides a comprehensive compliance framework including documentation checklists, vendor evaluation criteria, and detailed analysis of all relevant IRS guidance.