A recent Internal Revenue Service (IRS) Chief Counsel Advice (CCA) released by the employee benefits division is the latest statement by the IRS on the issue of "what is insurance." In CCA 201719025, released May 12, 2017, the IRS determined that an arrangement involving a self-funded accident or health plan did not qualify as insurance for US federal income tax purposes, where the average amount received by an employee for participating in a health related activity generally exceeded the after-tax contributions made by the employee to the plan. As a result, benefits received under the plan did not qualify for the exclusion for accident or health insurance benefits under section 104(a)(3) and were included in the employee's income.

In considering whether the benefits paid under the employer provided, self-funded plan should be included in the income of the recipient employee, the IRS explained that although the participating employees received a payment for engaging in certain health-related activities, the activities did not involve a fortuitous risk of economic loss (unlike, for example, a doctor's visit when ill) and, accordingly, (i) did not involve the shifting of an insurance risk, and (ii) could not be characterized as insurance. As a result, the payments were not amounts received by the employees as "amounts received through accident and health insurance (or through an arrangement having the effect of accident or health insurance)" for purposes of section 104(a)(3) and, therefore, could not be excluded from income under that provision.

According to the IRS, the plans at issue in the CCA were each an attempt to convert pre-tax contributions or employer-provided funds into tax-free benefits and to circumvent the requirements to pay FICA and FUTA. This CCA reflects the IRS's continuing interest in whether certain arrangements qualify as insurance.