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Fixed indemnity health coverage pays insured individuals a specified amount of cash for certain health-related events (for example, $100 for each medical office visit and $200 for each day in the hospital), regardless of the amount of medical expense actually incurred.
According to internal memos released by the IRS’ Chief Counsel’s office, the tax treatment of payments from fixed indemnity coverage generally depends on how premiums for the coverage are paid.
Payments are not taxable if premiums are paid by employees with after-tax dollars (or paid by the employer and imputed to employees as taxable income).
Payments are taxable (to the extent they exceed the cost of medical care) when premiums are paid by employees on a pre-tax basis or paid by the employer and not imputed to employees as taxable income.
When fixed indemnity payments are taxable, employers should confirm that income and employment taxes are being properly withheld.
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