A Warning Call to Business Owners on the Next Post-ERC Scam: Wellness Plans


A Warning Call to Business Owners on the Next Post-ERC Scam: Wellness Plans

February 22, 2024  |  11 min read

In the wake of what is likely the end of the Employee Retention Credit (ERC) program as we know it, there has been a new wave of aggressive emails flooding business owners’ inboxes pitching some version of a Section 125-compliant, FICA-saving “wellness” or other preventive health benefit or insurance plan. Virtually all versions of these plans involve some form of “reimbursements” or “bank” of benefits that are credited towards employees taking advantage of the program. Not surprisingly, many of these solicitations are coming directly from ERC mills, or former ERC “affiliates,” and are attempting to lure business owners and operators with an offer for a supplemental benefit plan that is just “too good to be true!”

However, unlike the calm that came before the ERC storm, the IRS has already proactively released clear guidance in an attempt to combat these scams through a recent Chief Counsel Memorandum (IRS CCA 202323006), outlining why these plans are completely bogus and illicit. However, we are still seeing the boilerplate response from this new cohort of “mills”:

“Oh, that IRS guidance is intended for the rest of the bad players in the space. Our plan is compliant. We have third-party tax lawyers backing us up. We’re different.”

We urge you: please don’t believe them. We’ll explain in more detail how the interaction will play out.

The “Too-Good-to-Be-True” Pitch

Here’s the typical narrative that we’re seeing in the space:

Promoter: “Imagine this: a supplemental health plan that provides real benefits to your employees that results in: (i) FICA tax savings to you as an employer, and (ii) has zero net cost to your employees after factoring in their own tax savings over the cost of the plan. That’s right, the plan literally creates tax saving on both sides, so it basically offers free services or benefits, and both sides of the table save real money.”

Susceptible Employer: “That’s sound great! What’s the catch? There’s got to be a catch?!”

Promoter: “Okay, okay. You’re right. There’s no such thing as a FREE lunch. There is actually a catch. In order for the plan to work, your employees do need to engage in some type of prescribed monthly or quarterly wellness activity. This might be as simple as getting their blood pressure taken or watching a wellness blog. But don’t worry, even if they forget we have some workarounds. In fact, in the worst case we can just simply send them a “wellness email” that we count as an activity if they open the email. Sounds great, right?”

Susceptible Employer: “Well this certainly sounds too good to be true! Are you sure this is compliant with the tax law?”

Promoter: “Oh absolutely, there are lots of firms that look like us, but only very few are compliant with Section 125 like ours. In fact, we’re so compliant that we even have written tax opinions that basically guarantee that you can’t be penalized for anything!”

Susceptible Employer: “Oh my, that sounds very buttoned up. Where do I sign?”

Note, some of these plans even skip the concept of a “wellness activity” and operate by allowing each employee to “purchase” additional medical benefits or services with “tax savings” provided by the program (i.e., a “bank” of benefits). Any proposed plan that claims to provide net zero cost to the employee and employer is almost certainly a wellness plan scam. Be on the lookout for terms like “tax advantaged” and “win-win scenarios.”

If this is starting to sound eerily similar to the way ERC was aggressively pitched, you won’t be surprised to learn that there are material key points that are left out of this discussion. Before we go into the key points, let’s look at how these plans attempt to arrive at a conclusion that both the employer and employee “win” when employees opt into the plan.

“Tax Savings Everywhere!”

Whether the proposed plan follows the traditional preventative wellness plan, or something disguised as part of a worker’s compensation or life insurance package, the math illustrating the “savings” is usually quite similar.

Most of the plans propose a monthly deductible of around $1,200 which is borne 100% by the employees. Then, assuming the requisite wellness activity is completed by the employee, a rebate or reimbursement of around $1,000 is paid or credited to the employee, less an “admin fee” of approximately $100. So, before we start talking about tax savings, the net monthly deductible to the employee is only $200, plus the $100 admin fee to arrive at $300 total. Wow, what a deal!

In other cases, the reimbursement is shown as the full $1,200 per month, with the cost of benefits separately stated and advertised as being “paid” with the employee’s tax savings, thereby creating a “bank” of benefits equal to the tax savings.
Either way, let’s be honest, most employees wouldn’t opt for meager supplemental health benefits for $300 a month. But here’s where the tax saving come in…

  • Employer: Since the plan is 100% borne by the employee out of their wages, there is no net cost to the employer. Then, if the plan meets the requirements of Section 125, on its face, a $1,200 reduction could be applied against the employer’s social security and Medicare wages resulting in a per employee, per month saving of ~$92 ($1,200 x 7.65%). Multiply that amount times 12 months and the number of employees, and wow, we’re talking some reals savings here!
  • Employee: Many of the pitches don’t initially go into as much detail on the employee’s situation, but I assure you it’s even more alluring than the employer savings. After all, how are we going to get these employees to bite on opting into this voluntary, supplemental program? From the employee’s perspective, they are not only promised their share of a FICA reduction saving of ~$92 per month, but that are also promised that they’ll be able to deduct the full $1,200 against their income taxes! Assuming an effective income tax rate of say, 25%, that means there’s an additional $300 in monthly tax savings. All in all, we’re looking at nearly $400 in promised tax savings, as compared to the net $300 total cost of the program. Who wouldn’t opt into this program to save $100 a month if all they have to do is open a simple wellness email?

Where it All Falls Apart…

Every party has a pooper and while everyone hates to see the party end, it’s thrilling to watch the events unfold. The pitch begins to fall apart when the Wellness Plan (i.e. “scam”) promoter starts to flood your inbox with long, complex tax opinions written by lawyers from firms you’ve never heard of that are purported “experts” in this space. You look up their credentials and you will be surprised to see they went to notable law schools and seem to fit the bill. You see fancy acronyms like “WIMPER” and “SIMPR” and you start to question again if this is all real, so you Google those terms and find some impressive looking CPA Journal article covering the same topic. The article is too long to read so you jump back to the opinion. You skim from the top and then decide to skip to the end of the opinion. It is very clear and definitively says the plan you are considering is a qualifying plan under Section 125.

What’s left to think about? You’ve got an apparently highly credentialed lawyer telling you through an opinion that “all is good.” But wait, did you read the part of the opinion that quickly glossed over the tax treatment to the employee? What did it mean that “whether the benefits are taxable depends on the individual’s unreimbursed medical expenses,” or sometimes, just the employees’ “facts and circumstances” or “situation?”

You start to question this vague conclusion and you push back on your promoter.

Promoter: “Oh that just means that as long as each employee has more medical expenses in a year than the reimbursements, then they should be fine. Don’t’ worry, most people average that amount or more anyway in expenses.”

Okay, so even if an employee doesn’t quite have that high of medical expense, then surely only the net reimbursement over those medical expenses could be taxable? That’s doesn’t sound so bad. Oh, it’s much worse than that…

You decide to call up your trusted CPA and ask them to look into this for you. The CPA stumbles upon a fairly recent IRS Chief Counsel Memorandum, hurriedly reviews it in a sweat, and calls you in a panic…

CPA: “Don’t do it! It’s the employee that gets screwed! 100% of the reimbursement is taxable!”

Susceptible Employer: “How can that be? What about the concept of it being treated as a reimbursement of medical expenses?”

CPA: “Oh it’s really quite simple, actually. The IRS states very clearly: “The [income tax] exclusion under Section 105(b) is limited to amounts paid solely to reimburse expenses incurred for medical care and does not apply to amounts which the taxpayer would be entitled to receive irrespective of whether expenses for medical care are incurred.”

Susceptible Employer: “For darn’s sake, speak to me in English!”

CPA: “Oh so sorry my friend, what the IRS is saying is that if a plan automatically pays a “reimbursement,” regardless of whether the recipient employee incurs actual medical expense, then 100% of the reimbursement is subject tax both FICA and income tax. Said differently, the $1,000 in that wellness plan gets paid or credited to your employees, regardless of whether they have actual medical expenses, and therefore, is subject to tax. This is why the attorney who wrote that memo punted on concluding any non-taxable treatment to the employee. The attorney just simply said, ”that’s for the employee to figure out.” No skin off the attorney’s back if they don’t actually get the net $100 month in tax savings. Afterall, the happy conclusion for the employer is still true!”

Susceptible Employer: “Oh wow, that’s awful. I mean, I’m not saying I’d do this, but couldn’t I still get the FICA tax saving and let the employees deal with their own issue? It’s not like the IRS is going to audit each and every one of them. How would they find out?”

CPA: “That’s a terrible idea! Remember, you are responsible for withholding and remitting income tax to your employees. Do you really think the IRS wouldn’t penalize you directly for this failure to withhold? It’s much more likely the IRS would seek the employee’s underpaid tax from you than your employee. You would have proposed this plan to them, after all!”

Susceptible Employer: “Aww shucks. I guess what they say is true, ‘if something seems too good to be true, it probably is.’”

A Sad but Unsurprising Conclusion

After another quick Google search on this topic, you’ll likely realize that Wellness Plan scams are by no means a recent invention. There have been waves of articles published over the past ten years or so that seem to correspond to waves of new activity popping up or IRS bulletins, publications, etc. warnings about them. Yet here we are in an environment where the IRS is placing an immense amount of scrutiny on ERC mills, yet the same mills or their offspring or distant cousins continue to exploit business owners and operators in pursuit of their own exploits. And of course, in most cases the person contacting you is not actually selling the plan directly, they are an “affiliate” of a group that is “connected” to the broker that can source the plan. By the time the proverbial “excrement hits the blades on that rotating device on the ceiling,” your “expert” is long gone with the wind.

While the IRS is aware of these plans, they continue to play the perpetual game of tax scam whack-a-mole as these scams grow and evolve. If you or someone you know is participating in these scams, we urge you to inform them of this exploitative scheme. The vultures are out, and they continue to be hungry now that their ERC opportunities have gone by the wayside. Be vigilant out there taxpayers and tax professional heroes!

Written By:


Kenneth Dettman, CPA

Chief Executive Officer & Managing Director
Kenneth Dettman, CPA

Kenneth Dettman, CPA

Chief Executive Officer & Managing Director
Kenneth (“Kenny”) Dettman, CPA, CEO and Managing Director, leads Sagemont Advisors with 15 years of complex tax advisory experience. He is considered a pioneer and innovator in the tax industry, having both worked extensively as a client-focused tax advisor, as well as launching early stage tax and compliance technology companies. Kenny was previously a tax partner at a global top 25 consulting firm, Alvarez & Marsal (“A&M”),...
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