Is the Section 125 "Double Dip" a Scam? What the IRS Actually Said
What the "double dip" claim actually is
The "double dip" label is applied to arrangements that appear to let an employee convert taxable wages into tax-favored income twice over: once when a pre-tax election lowers taxable wages, and again when a benefit pays cash back to the employee that the promoter treats as entirely free of tax. Stated that way, the concern is legitimate. If a plan genuinely let money escape tax on both ends with no reconciliation, that would be a problem.
The important question is whether that description matches how a properly built fixed-indemnity plan actually works. In most cases it does not, and the difference is in the details the label skips over.
What the IRS said in 2023
In May 2023, the IRS issued a Chief Counsel Advice memorandum addressing a specific fixed-indemnity arrangement. The fact pattern it examined was narrow: a plan that paid a fixed monthly amount, in that case a set sum, to employees for participation in certain health or wellness activities, with the benefit routed from the insurer to the employer and then out to employees through the employer's payroll system. The memo concluded that, on those facts, the payments were taxable.
Two things about that guidance matter enormously and are usually left out of the scary version.
First, a Chief Counsel Advice memorandum is not binding law. It is internal guidance issued in response to a question from a field office, it does not set the official position of the IRS, and by its own terms it cannot be cited as precedent. A later memo can take a different position on the same issue without the earlier one being withdrawn. It tells you how one office reasoned about one set of facts. It does not rewrite the statute.
Second, and more important, look at what the 2023 fact pattern actually was. The benefit paid on activity participation, not on a documented medical event, and the employee bore no cost for the activity. That is the design that draws scrutiny, and rightly so, because a payment triggered by an activity rather than by qualified medical care is not reimbursing a Section 213(d) expense. The memo was describing the aggressive end of the category, not the whole category.
What it did not say
The 2023 memo did not say that fixed-indemnity insurance is a scam. It did not say that a Section 125 pre-tax election fails to reduce taxable wages, because that much is settled. And it did not displace the rule that has governed indemnity payments for decades.
That rule is the "excess benefit" rule from Revenue Ruling 69-154, which is actual legal authority. It says an employee must include in gross income any indemnity amount received that exceeds the actual amount spent on medical care. In other words, the tax code already has a built-in reconciliation. A fixed-indemnity benefit is excluded from income to the extent it reimburses genuine Section 213(d) medical expense, and any excess above that is includable and reported by the employee. There is no second, untaxed dip. The reconciliation is the answer to the "double dip" worry, and it has been on the books since 1969.
Where the real line sits
So the straight answer to "is this a scam" is: it depends entirely on the design, and the test is not hard to state.
A plan earns the criticism when it pays on activity participation rather than a documented medical event, when it treats every dollar as free of tax with no reconciliation, and when it describes itself as free of tax full stop. A plan sits on the right side of the line when it pays on a documented Section 213(d) medical event, when it applies the excess-benefit reconciliation so that any amount above qualified expense is reported, and when it describes the tax treatment accurately rather than promising the impossible. The label "double dip" does not distinguish between those two, which is exactly why it is more useful as a marketing scare than as an analysis. The distinction is in the mechanics.
There is one genuinely unsettled question inside all this, and it deserves to be named rather than papered over. Whether an includable excess on an indemnity payment is also treated as wages for payroll-tax purposes is not fully resolved. The stronger reading, grounded in the definition of wages as remuneration for services, is that an indemnity benefit is not wages, because the employee performed no service to trigger it; the payment follows a medical event, not work. But that specific question is genuinely unsettled, and a firm that tells you otherwise is overclaiming.
Where Optiv fits
The Optiv Advantage is a fully insured fixed-indemnity benefit that pays on documented Section 213(d) medical events, funded through a Section 125 election, with the excess-benefit reconciliation built in. It is described as what it is, never as free of tax. Our gated white paper The Double-Dip Myth separates the label from the mechanics in full, with the underlying authorities.
KNOW YOUR NUMBERS, BEFORE YOU MAKE THE CALL.
This article is educational and is not legal or tax advice. Chief Counsel Advice memoranda are non-precedential and do not bind the IRS or the courts. Source: IRS Chief Counsel Advice 202323006 (May 9, 2023); Rev. Rul. 69-154; IRC Sections 125, 105(b), 106, 213(d); Treas. Reg. Section 1.105-2. Fixed-indemnity benefit payments may be potentially taxable on the excess, and the wage-treatment question is genuinely unsettled.
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