Consumer Alert
Beware of Non-Compliant Programs
At Overlay Health, compliance and transparency are at the core of our population health program.
Critical Warning
Unfortunately, not all programs in the market share our commitment to compliance. In recent years, federal agencies have issued multiple warnings about non-compliant "wellness" or "cash benefit" schemes that misrepresent themselves as legitimate insurance or tax-advantaged arrangements.
These arrangements can expose employers and employees to:
- ⚠️ Unexpected tax liability (benefits reclassified as wages)
- ⚠️ IRS penalties and audits for improper cafeteria plan use
- ⚠️ Uncovered medical expenses when coverage is marketed as "comprehensive" but fails to meet federal standards
What Regulators Are Saying
IRS Chief Counsel Advice (2023)
The IRS warned that certain employer-funded indemnity benefits routed through payroll could be misclassified as wages, making them taxable and subject to FICA/FUTA.
Revenue Ruling 69-154
The IRS has long held that indemnity payments beyond actual medical expenses must be reported as taxable income.
Tri-Agency Final Rule (April 2024)
The Departments of Treasury, Labor, and HHS flagged ongoing deceptive marketing of fixed indemnity and "short-term" products that mimic health insurance while avoiding ACA consumer protections.
IRS Clarification
In recent guidance highlighted by Aflac's IRS Advisory Summary, regulators drew a sharp distinction between self-funded indemnity arrangements (which they view as non-compliant) and fully insured fixed indemnity policies.
How to Protect Yourself
When evaluating any population health or indemnity-based solution, ask these critical questions:
Is it fully insured and state-filed?
Overlay Health is filed and approved in 38 states plus D.C.
Are premiums handled through a compliant Section 125 cafeteria plan?
Our structure aligns with IRS rules, ensuring proper pre-tax treatment of premiums.
Are indemnity payments treated according to the IRS "excess benefit" rule?
Overlay Health applies long-standing Section 105/213(d) guidance — ensuring only benefits beyond medical expenses are taxable.
Does the program rely on official law and federal guidance — not loopholes?
Overlay Health is aligned with IRS revenue rulings, Chief Counsel Advice, and federal rulemaking.
The Bottom Line
Be cautious of any arrangement marketed as a "tax-advantaged wellness plan" or promising "tax-free cash benefits." Regulators have repeatedly labeled such programs non-compliant and potentially harmful.
Overlay Health is Different:
🔗 Verify for Yourself
Disclaimer
This Consumer Alert is provided for educational and informational purposes only. It should not be relied upon as legal or tax advice. Employers and employees should always consult with their trusted legal, tax, or benefits professionals before making decisions regarding their health benefits.