White Paper · Cost Strategy

Executive summary

Employer-sponsored premiums are projected to rise about 9.5 percent in 2026, among the steepest increases in fifteen years, driven by high-cost GLP-1 drugs, advanced cancer therapies, and surging mental-health utilization. These pressures are prompting a majority of employers to adopt cost-cutting measures. This paper examines Optiv Advantage, a fully insured fixed indemnity benefit funded through a Section 125 election, as a response.¹

Optiv Advantage addresses the co-pay, deductible, and co-insurance gaps that fuel a roughly $195B medical-debt crisis affecting about 41 percent of adults. Its features include zero cost-share telemedicine for primary and urgent care, a chronic-disease prescription formulary covering 350-plus medications across 50-plus conditions, and fixed indemnity cash benefits for hospital and other acute medical events.

The structure works on two sides. On the funding side, the premium is paid through a Section 125 election, which lowers the employee's taxable wages and reduces the employer's matching payroll tax. On the benefit side, the fixed indemnity payment reimburses Section 213(d) medical expense and is excluded from income under Section 105(b) to that extent, with any excess includable under the rule of Rev. Rul. 69-154.²

The figures in this paper are illustrative and tied to stated assumptions. Used that way, the employer payroll-tax recovery is a forecastable line item rather than a promise, and the employee value depends on each person's own elections and expenses.³

Where the pressure comes from

The cost problem

The cost pressure on employer plans is structural rather than cyclical. Three figures frame it.

Premiums have outpaced general inflation for years, and a large majority of executives describe current costs as excessive. Among the strategies employers are adopting for 2026, supplemental fixed indemnity is rising fastest. The trend below shows the gap: medical-care prices have risen far faster than prices for all goods and services since 2000.⁴

Employers are responding by shifting cost somewhere, to deductibles, to supplemental coverage, to renegotiated carrier terms. The question this paper takes up is where the cost finally lands, and who absorbs it.

Where the cost lands

The co-pay, deductible, and co-insurance gap

Cost-sharing has outrun household capacity to absorb it. The result is a debt problem that lands on the same employees an employer is trying to retain.

High-deductible plans now cover a majority of enrolled workers, and deductibles above $5,000 convert manageable conditions into catastrophic bills. Roughly one in four patients ration prescribed medication. Optiv Advantage is designed to put cash against exactly these gaps, before they become debt.⁶

Prescription coverage

Chronic-condition formulary and workforce prevalence

The formulary concentrates on the maintenance medications that drive a large share of employer plan cost, the chronic conditions most of a workforce actually carries.

Exclusions

Insulin, GLP-1 drugs, specialty-condition drugs, and cancer-treatment medications are not covered. These default to the employer-sponsored major-medical plan.

How the cash maps to the gap

Indemnity benefits and typical co-pay exposure

Fixed indemnity pays a defined cash amount on a defined event. Where that amount exceeds the associated co-pay or cost-share, the excess reimburses real Section 213(d) costs, such as transportation, lodging, and other event-related out-of-pocket expense.

Where the exclusion stops

The excess-benefit boundary

The Section 105(b) exclusion is not unlimited. It reaches the portion of a benefit that reimburses actual Section 213(d) medical expense. Where a fixed benefit exceeds the expense actually incurred, the excess is includable in gross income. That has been the rule for fixed indemnity benefits for decades.¹²

The arrangement is built around that rule rather than hiding it. The excess is determined by the employee, who alone holds the medical-expense information, through a calculation that subtracts qualified Section 213(d) expense from total indemnity received.

Excess-benefit calculation · illustrative

Illustrative only, tied to the stated assumption. Most participants have qualifying expenses that substantially offset the indemnity. The taxable excess depends on each employee's actual Section 213(d) expense, which only the employee can determine. Not a promise of any outcome.

Insurance carriers typically do not issue a 1099 on these payments, and the amounts do not appear as wages on the W-2. The employee assembles the total indemnity received, subtracts qualified Section 213(d) expense, and reports any excess as other income.

The employer side

How employers recover cost

Two effects work together: a payroll-tax reduction on the pre-tax premium, and a benefit offset where Optiv Advantage absorbs costs the major-medical plan would otherwise carry. Any administration fee is disclosed and netted in the figures below.¹³

Pre-tax Section 125 salary reductions are excluded from the wage base under IRC §§ 3121(a)(5)(G) and 3306(b)(5)(G), so the employer's 7.65 percent match is calculated on a smaller number. On the assumption above, that is about $1,377 per participant per year gross, and about $957 per participant per year after a $35 monthly administration fee.

State this carefully

The employer recovery is a reduction in the payroll-tax base, modeled from a census. It is not a guaranteed dollar amount and not employer profit. Every figure here is an illustration tied to a stated assumption, and the administration fee is netted in each recovery figure. No figure is presented as a guaranteed outcome.

The employee side

Value for employees

For the employee, value comes from three places: a pre-tax premium reduction that lowers taxable wages, no-deductible prescriptions and telemedicine, and indemnity cash that is gross income only to the extent it exceeds documented Section 213(d) expense.¹⁴

Because the premium is paid pre-tax, it reduces the employee's federal taxable income and FICA, and in many states the state taxable income as well. The indemnity offset matters because, without it, an employee deducting medical expense must both itemize and clear the Section 213(d) threshold of 7.5 percent of adjusted gross income. Most employees do neither.

The indemnity structure lets qualified Section 213(d) expense offset the benefit directly, which is what keeps most of the cash out of gross income. On an illustrative $1,500 monthly pre-tax premium producing a $1,200 monthly indemnity, a participant in the stated example sees a net annual take-home increase. The figure depends entirely on the employee's own elections and expenses and is not a promised outcome.

The legal framework

The compliance framework

The tax posture rests on a chain of settled authority, with one question on the benefit side that remains open and is stated as open rather than papered over.¹⁵

• Risk-shifting
  A material transfer of insurance risk satisfies the insurance-characterization test of Helvering v. Le Gierse, 312 U.S. 531 (1941), and Rev. Rul. 2002-89, supporting treatment as genuine insurance rather than disguised compensation.
• Excepted benefit
  Non-coordination with the major-medical plan supports treatment as an excepted benefit under 45 C.F.R. §148.220(b)(4), ERISA §733(c)(2), and IRC §9832(c)(2).
• Non-precedential guidance
  The Service has scrutinized arrangements that pay on activity participation. The Chief Counsel Advice addressing such an arrangement is non-precedential and is distinguishable from a benefit that pays only on a documented Section 213(d) event.

A 2025 tax opinion on file

A 2025 tax opinion on file reaches the not-wages conclusion. It was prepared on its own facts, is referenced here as an industry position, may not be relied upon by any reader, and is not a representation about how any specific employer's plan will be taxed.