Frequently Asked Questions

A dual-premium structure uses two separate insurance policies with two separate premium streams:

• Policy 1: Funded with pre-tax dollars through a Section 125 cafeteria plan. Covers qualified medical benefits (MEC, critical illness, accident, life insurance). Employer saves FICA on these premiums.
• Policy 2: Funded with after-tax dollars from employee net pay. Covers wellness/fixed indemnity benefits. Benefits are tax-free under IRC §104(a)(3) because the employee paid the premium with after-tax dollars.

This separation ensures each policy operates under its own legal framework and addresses IRS concerns about programs trying to get tax advantages on both premiums AND benefits from a single policy.

A "double dip" structure (as described in IRS guidance) uses a single policy funded entirely with pre-tax dollars while claiming benefits are also tax-free. The IRS objects because you can't get tax advantages on both ends from the same premium stream.

A dual-premium structure uses two separate policies:

• Pre-tax funding goes to Policy 1 (qualified benefits under §105/§106)
• After-tax funding goes to Policy 2 (wellness benefits under §104(a)(3))

Each policy has its own legal basis for tax treatment. There's no "double dip" because the wellness benefits come from a policy funded with after-tax dollars—not the same policy that received pre-tax premiums.

The IRS does not "approve" specific program designs in advance. However, dual-premium structures rely on well-established tax law:

• Section 125 (cafeteria plans): Enacted in 1978, provides FICA exclusion for qualified benefits funded through salary reduction
• Section 104(a)(3): Part of the 1954 Internal Revenue Code, excludes benefits from accident/health insurance when premiums are paid with after-tax dollars
• Treasury Regulation §1.104-1(d): Confirms the after-tax premium principle
• Revenue Ruling 69-154: Establishes that excess indemnity payments are tax-free when premiums are paid after-tax

The IRS has never challenged the fundamental principle that after-tax premium funding supports tax-free benefits. CCA 201703013 explicitly confirms this principle.

Key documentation includes:

• Section 125 cafeteria plan document
• Separate policy documents for each insurance policy
• Summary Plan Descriptions for both policies
• Employee enrollment forms showing both premium deductions
• Payroll records clearly separating pre-tax and after-tax deductions
• Pay stubs showing proper coding for each premium
• Certificates of insurance from licensed carriers
• Evidence of risk transfer (carrier bears actuarial risk)

Key evaluation criteria:

• Insurance carriers: Licensed in your state, rated by AM Best or Demotech, genuine risk transfer to the carrier
• 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

Professional skepticism is appropriate and healthy. Many advisors are unfamiliar with dual-premium structures because they're relatively specialized.

Provide your advisor with:

• The program's legal opinion from tax counsel
• Documentation of the dual-premium separation
• References to IRC §104(a)(3), Treasury Regulation §1.104-1(d), and Revenue Ruling 69-154
• A copy of The PTE Gold Book for comprehensive analysis

Most concerns stem from conflating dual-premium structures with the single-premium "double dip" arrangements the IRS has criticized. Once advisors understand the separation, their concerns typically resolve.

Employer FICA savings are typically 7.65% of the pre-tax premium amount per employee (6.2% Social Security + 1.45% Medicare).

Example calculation:

• Pre-tax premium: $1,560/month per employee
• Employer FICA savings: $1,560 × 7.65% = $119.34/month
• Annual savings: $1,432.08 per employee
• Less administration fee: ~$240-420/year
• Net savings: $1,000-1,200 per employee annually

Actual savings vary based on premium levels, employee demographics, and administration fees. Most employers see net savings of $700-1,100+ per employee per year.