Requisite Information Related to FICA Savings

Section 104(a)(3): The After-Tax Premium Safe Harbor

The Statutory Foundation for Tax-Free Insurance Benefits

IRC Section 104(a)(3) has been part of the tax code since 1954. It establishes a simple principle: when you pay insurance premiums with after-tax dollars, the benefits you receive are tax-free.

This 70-year-old provision is the legal foundation for compliant dual-premium wellness programs—and it's never been challenged by the IRS.

What the Statute Says

26 U.S.C. § 104(a)(3)

"[G]ross income does not include... amounts received through accident or health insurance (or through an arrangement having the effect of accident or health insurance) for personal injuries or sickness."

This exclusion applies when premiums are paid with after-tax dollars. Treasury Regulation §1.104-1(d) confirms: "If an individual purchases a policy of accident or health insurance out of the individual's own funds, amounts received thereunder for personal injuries or sickness are excludable from gross income."

The Core Principle

After-Tax Premium = Tax-Free Benefits

When an employee pays insurance premiums with money that has already been taxed (after-tax dollars), the benefits received from that policy are excludable from gross income. The employee has already paid tax on the money used to buy the coverage.

No Medical Expense Limitation

Unlike Section 105(b), which limits exclusions to actual medical expense reimbursements, Section 104(a)(3) has no such limitation. Benefits can exceed actual expenses and still be tax-free—as long as premiums were paid after-tax.

Fixed Indemnity Qualifies

Fixed indemnity policies—which pay set amounts for covered events regardless of actual expenses—qualify under Section 104(a)(3). Revenue Ruling 69-154 confirms that "excess" payments beyond actual expenses are excludable when premiums are paid after-tax.

The Employee-Funded Distinction

The key is WHO pays the premium and HOW. If the employer pays (or premiums are paid pre-tax through salary reduction), Section 105 applies. If the employee pays with after-tax dollars, Section 104(a)(3) applies.

70 Years of Established Law

1954
Section 104(a)(3) enacted as part of the Internal Revenue Code of 1954. Establishes exclusion for benefits from accident/health insurance paid for by the individual.
1969
Revenue Ruling 69-154 confirms that fixed indemnity payments exceeding actual medical expenses are excludable when premiums are paid with after-tax dollars.
1978
Section 125 enacted, creating cafeteria plans. This creates the pre-tax/after-tax distinction that becomes central to modern wellness program structuring.
2017
CCA 201703013 explicitly confirms: "to the extent that premiums are paid with after-tax dollars, payments by the plan are excluded under § 104(a)(3)."
2023
CCA 202323006 addresses pre-tax-only structures but does not challenge the Section 104(a)(3) principle for after-tax funded policies.

Ready for the Complete Analysis?

The PTE Gold Book provides comprehensive analysis of Section 104(a)(3), related Treasury Regulations, and how these provisions apply to dual-premium wellness programs.

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