Snake Oil Salesmen
“Tax Avoidance – Wage Theft schemes
sweeping California”https://www.rightscenter.org/news/
https://labor411.org/411-blog https://bloggers.feedspot.com/california_law_blogs/?_src=search
Many business owners are nervous about tariffs, deportations, lack of qualified labor, AI,
and so on. More than ever businesses are open to any ideas to save money. There is
a wave of fraudsters seizing this opportunity offering by offering “to good to be true” tax
avoidance schemes disguised as “Employee Wellness Programs”. Employees are
auto-enrolled without the ability to get sound tax advice, and $12,000 of their pay is
converted into untaxed income that will likely have negative financial impact down the
road. Businesses pay no taxes on this money and workers receive $12,000 of wages
with no taxes taken out, giving them an appearance of higher take home pay. Despite
IRS, EEOC and FTC warnings the temptation of avoiding massive amount taxes and
insurance premiums is too great and businesses and employees are going all in.
The financial impact to the federal government, state government, insurance
companies, businesses and workers will likely be devastating. In fact, the lack of
prosecution is largely driven by the disbelief of regulators that this is really happening.
Unenforcement has increased the motivation of marketeers to hard core sell the false
claims without fear of prosecution.
Example of How it Works
Business with 100 workers that make $40,000 or $4 million of payroll and a workers
comp rate of 7% of payroll.
The marketeer sells an employer sponsored insurance policy as a“Sec 125 Wellness
Plan” to employer and tells them “lets make the employees pay for 100% of the
premium through a sec 125 plan to reduce your payroll and avoid paying taxes or
insurance premiums”.
- Auto-enroll workers (hands them a flyer which says they will make more take-
home pay. - The “wellness plan” costs $1,200 per month or $14,400 annually. They prey on
lower paid workers where the wellness plan costs up to 36% of their income.
Because it is paid through a Sec 125 (IRS code) plan it reduces a workers W2
wages to $25,600 and the $14,400 shows as “other” on their W2. - The marketeers keep $2400 of the untaxed for the wellness premium as
commission and to pay for costs. To legally qualify for the $1000 monthly
payment returned to the employee, the employee must perform certain welnness
tasks on a monthly basis (which it is unreasonable to expect). Without
performing the tasks the worker forfeits the monthly $1000 payment.
Net effect
$4 million of taxable payroll is reduced by $1,440,000 to $2,560,000.
- Employer avoids paying FICA FUTA and SUTA taxes and workers compensation
premiums on $1,440,000. Roughly $200k in employer taxes avoided and $45k in
workers compensation premiums. - Employees have no withholdings on $1,440,000. Roughly another $200k in
withholdings - $450k in taxes and insurance premiums are
The plans go undetected for long periods of time because reporting looks like a
reduction of payroll that could be due to layoffs or reduction of work.
Remedies
The Insurance Commissioner enforces basic insurance laws
- People selling the plans are not licensed insurance agents in the state of
California - Undisclosed insurance carrier
IRS enforcement will likely happen over time, leaving many irreparably harmed. - https://www.irs.gov/pub/irs-wd/202323006.pdf
Federal trade commission “deceptive - Reimbursements are marketed as “Post Tax” when no taxes have been taken out
- Employees are likely to not have $12,000 of deductions to offset the untaxed
reimbursement - HIPPA violations
Lawsuit from Attorney General - PAGA violations Mischaracterized payments, improper withholding,
- Civil rights violations
Many Articles have been written by Law firms and CPA firms.
https://www.grantthornton.com/insights/newsletters/tax/2023/hot-topics/jun-20/irs-says-
wellness-benefit-payments-are-subject
https://www.jdsupra.com/legalnews/critical-compliance-issues-for-employee-4819862/
https://www.bdo.com/insights/tax/irs-cautions-employers-again-on-wellness-plans-
purporting-to-avoid-payroll-taxes-absent-medical-expe
https://hylant.com/insights/blog/fica-tax-avoidance-wellness-program-viewed-
unfavorably-by-87-000-new-irs-agents
IRS guidance
https://www.irs.gov/pub/irs-wd/202323006.pdf
https://www.thetaxadviser.com/newsletters/2017/sep/beware-promoters-save-
employment-taxes-health-plans/
EEOC guidance
Violates title 1 of the ADA, lacks reasonable designed standards
- Workers will likely not have $12k in offsetting health expenses.
- Requires action on employees part every month to qualify for $1000 award, no
way to enforce this action and not reasonable to think compliance is going to
happen. If employee doesn’t comply they could lose 1/3 of their wages.
Federal Trade Commission
https://wellnesslaw.com/blogs/news/wellness-professionals-should-be-familiar-with-the-
federal-trade-commission-health-products-compliance-
guidance?srsltid=AfmBOoogOlLE6DNJxbUwGpbBHwvHwYhGD915O8c9lflJEhyBWMiu
52PH
https://labor411.org/411-blog https://bloggers.feedspot.com/california_law_blogs/?_src=search
Works Rights Compliance Alliance 