The Pre-Tax PlaybookThe employer's briefing on Section 125 benefits
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Guide

Guide FAQs

Short answers. Every one footnoted.

Reviewed November 12, 2026 · Pre-Tax Playbook editorial team · Not tax or legal advice

Required federal noticeFixed indemnity insurance

IMPORTANT: This is a fixed indemnity policy, NOT health insurance

This fixed indemnity policy may pay you a limited dollar amount if you're sick or hospitalized. You're still responsible for paying the cost of your care.

  • The payment you get isn't based on the size of your medical bill.
  • There might be a limit on how much this policy will pay each year.
  • This policy isn't a substitute for comprehensive health insurance.
  • Since this policy isn't health insurance, it doesn't have to include most Federal consumer protections that apply to health insurance.

Looking for comprehensive health insurance?

  • Visit HealthCare.gov or call 1-800-318-2596 (TTY: 1-855-889-4325) to find health coverage options.
  • To find out if you can get health insurance through your job, or a family member's job, contact the employer.

Questions about this policy?

  • For questions or complaints about this policy, contact your State Department of Insurance. Find their number on the National Association of Insurance Commissioners' website (naic.org) under "Insurance Departments."
  • If you have this policy through your job, or a family member's job, contact the employer.
Is a Section 125 hospital indemnity plan health insurance?

No. Fixed indemnity insurance pays a set dollar amount on a covered event, not an amount based on your bill, and it isn't a substitute for comprehensive health insurance. A federal notice says so on marketing materials.[1, 2]

Does it replace our ACA medical plan?

No. It sits on top of your ACA-compliant medical plan. Employers with 50+ full-time-equivalent employees still face the ACA employer mandate, and hospital indemnity doesn't count toward it.[3]

Has the IRS approved this kind of program?

No. The IRS doesn't approve programs like this. The pre-tax premium through a written Section 125 plan is standard. The IRS has published positions questioning pre-tax fixed indemnity payments when there's no unreimbursed medical expense, and it has begun audits.[4, 5, 6]

Where do the savings come from?

From taxes that aren't paid on premium dollars: employer FICA, employee FICA and income tax. It isn't free money. The economics depend on the tax treatment of benefit payments being right.[7, 8]

How much could an employer save?

A simple estimate is the monthly premium × 12 × 7.65% per enrolled employee, before fees. At a $600 monthly premium, that's $550.80 a year, gross. Results vary and aren't guaranteed.[8, 9]

Does every employee come out ahead?

No. Take-home pay rises only if the plan pays claims close to the premium. Elysian screens employees, and in its case data roughly 60–80% of a workforce qualified.[10, 11]

Who can't participate pre-tax?

Only W-2 employees can pay pre-tax. Partners, more-than-2% S-corporation shareholders and 1099 contractors are treated differently.[12]

What does the IRS's 2023 memo say?

CCA 202323006 concludes that wellness indemnity payments under a pre-tax fixed indemnity policy are taxable wages if the employee has no unreimbursed medical expense related to the payment.[5]

Has the IRS started audits?

Yes. A September 2026 Morgan Lewis report says the IRS has begun auditing fixed indemnity health/wellness plans marketed on payroll tax savings.[6]

What's at stake for the employer if the IRS disagrees?

Under-withheld income tax, both halves of FICA, FUTA, penalties and interest. Tax liability for benefits programs often can't be handed off to vendors.[13]

Does it lower workers' comp premiums?

Possibly in California, where qualifying Section 125 benefit deductions are excluded from workers' comp payroll if records are kept. Don't assume it anywhere else.[14]

Who issues the policy?

A licensed carrier named in your policy documents. Elysian is a licensed producer appointed with Federal Life and U.S. Fire. We're still waiting on the policy form that names the issuing carrier.[15, 16]

More objections, answered with sources: FAQ & objections.

Sources & footnotes

  1. Verified Fixed indemnity rules: excepted benefits and the required notice. Treasury/DOL/HHS final rule, 89 FR 23338; Evidence request E-2 (group vs. individual policy form). Proof library P-52
  2. Verified A supplement — it does not replace major medical. Elysian client flyer (JobsRUs, 2025). Proof library P-28
  3. Verified The ACA employer mandate still applies. IRS — Employer Shared Responsibility Provisions. Proof library P-53
  4. Verified Step 1 — pre-tax premium through a Section 125 cafeteria plan. IRS Chief Counsel Advice 202323006; Elysian enrollment authorization (JobsRUs). Proof library P-30
  5. Verified CCA 202323006 — the key IRS memo. IRS CCA 202323006. Proof library P-58
  6. Verified The IRS has begun audits (law-firm report). Morgan Lewis — ML BeneBits. Proof library P-61
  7. Analysis It's not free money. Our analysis of P-30, P-32, P-33, P-58. Proof library P-36
  8. Analysis Employer FICA savings — how to estimate. Elysian benefits proposal (redacted client, provided by Elysian). Proof library P-41
  9. Verified Employer FICA is 7.65% for most hourly workers. Social Security Administration — maximum taxable earnings; IRS Tax Topic 751 — Social Security and Medicare withholding rates. Proof library P-40
  10. Analysis The take-home formula. Our analysis of P-30 and P-37. Proof library P-38
  11. Elysian-stated Not everyone qualifies. Elysian PEO implementation guide (provided by Elysian); Elysian benefits proposal (provided by Elysian); Elysian client flyer (JobsRUs, 2025). Proof library P-43
  12. Verified Only W-2 employees participate pre-tax. Elysian Dealer FAQ. Proof library P-44
  13. Verified What's at stake if the IRS disagrees. Morgan Lewis — ML BeneBits; Bloomberg Tax — HR Solutions That Become Tax Problems. Proof library P-63
  14. Verified California workers' comp may also drop. WCIRB California — Uniform Statistical Reporting Plan. Proof library P-42
  15. Verified Elysian is a licensed insurance agency appointed with two carriers. Nevada Division of Insurance — agency license record. Proof library P-2
  16. Pending NDA doc Which carrier issues the policy. Evidence request E-2 (policy form, certificate, SERFF filing). Proof library P-14