Voluntary Benefits: What It Means for Employers

What it means in practice

What the term means. "Voluntary benefits" is a workplace label, not a term defined in federal law. It covers coverage the employee elects and pays for, offered alongside the employer-paid part of an employee benefits package. Typical products are supplemental term life, accidental death and dismemberment (AD&D), accident, critical illness or specified disease, hospital indemnity, short- and long-term disability, and dental and vision plans. Gap or supplemental medical coverage is discussed under secondary insurance. Because the employee pays, three questions decide the employer's obligations: is the program an ERISA plan, is the coverage an excepted benefit, and are premiums taken before or after tax.

The ERISA voluntary plan safe harbor. ERISA's definition of a welfare plan, quoted in 29 CFR 2510.3-1(a)(2), includes plans providing benefits "in the event of sickness, accident, disability, death or unemployment," which describes most voluntary products. Paragraph (j) of the same regulation says a "group or group-type insurance program offered by an insurer to employees" is not an employee welfare benefit plan if four conditions are all met. (1) No contributions are made by the employer. (2) Participation is completely voluntary for employees. (3) The employer's sole functions are, without endorsing the program, to permit the insurer to publicize it to employees, collect premiums through payroll deductions and remit them to the insurer. (4) The employer receives no consideration, in cash or otherwise, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions.

What counts as endorsement. In Advisory Opinion 94-23A (July 1, 1994), written to the Air Line Pilots Association, DOL said an organization endorses a program if it expresses "any positive, normative judgment regarding the program," urges or encourages participation, or "engages in activities that would lead a member reasonably to conclude that the program is part of a benefit arrangement." DOL pointed to a brochure calling the coverage "ALPA-sponsored Insurance" and a letter saying the association was "enthusiastic" about it. Because the association also contributed through a claims fluctuation reserve and made plan-design suggestions, DOL concluded the program was an ERISA welfare plan.

If the safe harbor is not met. The program is then generally an ERISA welfare plan. Under 29 CFR 2510.3-102, amounts withheld from wages for a welfare plan become plan assets as soon as they can reasonably be segregated from the employer's general assets, and never later than 90 days after they would have been paid in cash. A summary plan description is required. The small-plan exemption in 29 CFR 2520.104-20 relieves a welfare plan with fewer than 100 participants at the start of the plan year from filing an annual report if benefits are provided only through insurance and employee contributions are forwarded within three months, but it does not remove the SPD requirement.

Excepted benefits under HIPAA and the ACA. 29 CFR 2590.732(c) lists coverage to which the group health plan rules in Part 2590 (HIPAA portability and the ACA market reforms incorporated into ERISA) do not apply. Coverage only for accident, including AD&D, and disability income coverage are excepted in all circumstances. Limited-scope dental and vision benefits are excepted if provided under a separate policy or not an integral part of a group health plan. Coverage for only a specified disease or illness and hospital indemnity or other fixed indemnity insurance are excepted only if the benefits are under a separate policy, are not coordinated with an exclusion under the sponsor's group health plan, and are paid regardless of whether that plan pays for the same event. Coverage sold as gap or supplemental coverage to a group health plan must also be under a separate policy and designed to fill gaps in the primary coverage.

What "fixed indemnity" means. To qualify, the insurance "must pay a fixed dollar amount per day (or per other period) of hospitalization or illness (for example, $100/day) regardless of the amount of expenses incurred." The regulation's example says a policy paying a fixed percentage of hospital expenses, up to $100 a day, is not an excepted benefit, even if in practice it always pays $100.

The 2024 fixed indemnity notice rule. The final rule published April 3, 2024 (89 FR 23338), effective June 17, 2024, added a notice requirement for group fixed indemnity coverage for plan years beginning on or after January 1, 2025. The notice must appear prominently on the first page of any marketing, application and enrollment materials given at or before enrollment, in at least 14-point font, and again in reenrollment materials if participants must reenroll. It begins "IMPORTANT: This is a fixed indemnity policy, NOT health insurance" and points to HealthCare.gov. If either the plan or the issuer provides it, the obligation is met for both. The Departments did not finalize the proposed payment standards or noncoordination changes, and Treasury and the IRS did not finalize proposed changes to 26 CFR 1.105-2. A DOL, HHS and Treasury statement of August 7, 2025, said the Departments would not prioritize enforcement of the 2024 rule's short-term, limited-duration insurance definition; its text does not mention fixed indemnity coverage.

Pre-tax or after-tax premiums. Publication 15-B (2026) lists accident and health benefits (but not long-term care insurance) and group-term life insurance coverage among the qualified benefits a section 125 cafeteria plan can offer, so many voluntary products can be paid by pre-tax deduction. Publication 15-A (2026) says contributions to a sick pay plan through a cafeteria plan, including salary reduction, "are employer contributions unless they are after-tax employee contributions." The preamble to the 2024 rule notes that Treasury and the IRS understand most fixed indemnity premiums are paid on an after-tax deduction basis, which keeps the benefits nontaxable.

Taxability of the benefits. Publication 525 (2025) says that if the employee pays the entire cost of an accident or health plan, amounts received for personal injury or sickness are not income; if the employer pays, they generally are, and if both pay, only the share due to the employer's payments is income. Compensation for permanent loss of a body part or function, figured without regard to time off work, is not taxable even if the employer pays for the plan. For disability income, Publication 15-A (2026) says sick pay attributable to after-tax employee contributions is not subject to Social Security, Medicare, FUTA or income tax withholding. Taxable sick pay is generally free of Social Security, Medicare and FUTA tax once paid more than 6 calendar months after the last month the employee worked. A footnote in the 2024 rule cites Rev. Rul. 2004-55: long-term disability benefits are excludable where the employee irrevocably elected, before the plan year, to have the coverage paid on an after-tax basis.

Supplemental life and the $50,000 rule. Publication 15-B (2026) and 26 CFR 1.79-0 treat a life policy as carried by the employer if the employer pays any part of its cost, or if it arranges for employees to pay and charges at least one employee less than, and another more than, the Table 2-2 cost of their coverage. When the policy is carried, the cost of coverage above $50,000, reduced by what the employee paid, is imputed income. Publication 525 (2025) says payments through a cafeteria plan do not reduce that amount unless they are after-tax contributions.

Payroll deduction authorizations. Federal wage rules on voluntary deductions such as insurance premiums are covered on the after-tax deduction and payroll deduction pages. Mid-year changes to pre-tax elections generally depend on the cafeteria plan's rules for a qualifying life event.

Where states differ. State wage payment laws set their own consent rules. One example: the Illinois Department of Labor's Deductions From Pay FAQ says deductions may be made when required by law, "to the benefit of the employee (such as health insurance premiums, union dues etc.)," or under a wage assignment or deduction order "made with the express written consent of the employee, given freely at the time the deduction is made." Where a deduction continues over time and the written agreement states the period, the same amount each pay period and a right of voluntary withdrawal, the FAQ says the consent is considered freely given at the time of each deduction (56 Ill. Adm. Code 300.720). Check each state where employees work.

Step by step for an employer. (1) List each voluntary product and who pays. (2) For any program meant to stay outside ERISA, confirm all four 2510.3-1(j) conditions, including no subsidy and neutral communications. (3) Confirm each product's excepted benefit category, and that fixed indemnity materials carry the 2025 notice. (4) Decide pre-tax or after-tax for each product in the cafeteria plan document. (5) Get written deduction authorizations that meet state law. (6) Remit premiums promptly and, for any ERISA plan, within the plan asset deadline. (7) Figure group-term life imputed income each year.

Example 1 (illustration): composite life rate. An employer pays nothing toward supplemental group-term life but lets the insurer charge every employee $0.20 per $1,000 a month. A 30-year-old pays more than the Table 2-2 cost ($0.08) and a 60-year-old pays less ($0.66), so the policy is carried by the employer. Assuming the other group-term life conditions are met, a 62-year-old with $100,000 of this coverage and no other employer life insurance pays $240 for 2026 ($0.20 x 100 x 12). The Table 2-2 cost of the $50,000 above the limit is $396 ($0.66 x 50 x 12). If the $240 is paid after tax, $156 goes in boxes 1, 3 and 5 and box 12 code C; if it is paid pre-tax through a cafeteria plan, the full $396 does.

Example 2 (illustration): disability premiums. An employee pays the entire short-term disability premium and later receives $1,500 a month from the insurer. If the premiums were withheld after tax, the payments are attributable to employee contributions and are not taxable sick pay. If they were paid through the cafeteria plan, Publication 15-A treats them as employer contributions, so the benefits are taxable sick pay.

Example 3 (illustration): fixed indemnity design. A policy paying $200 for each day in the hospital pays $600 for a 3-day stay, whatever the bill, which fits the fixed indemnity definition. A policy paying 20% of the hospital bill, up to $200 a day, does not, even when it pays the same $600.

Question: Can the employer's name appear in enrollment materials? The regulation allows permitting the insurer to publicize the program but bars endorsement, and AO 94-23A treated "sponsored" branding as endorsement. Review materials against those standards.

Question: Do HIPAA special enrollment rights apply to accident coverage? Not under Part 2590; accident-only coverage is excepted in all circumstances (29 CFR 2590.732(c)(2)).

Question: Who must give the fixed indemnity notice? The plan or the issuer; if one provides a compliant notice, the obligation is satisfied for both (29 CFR 2590.732(c)(4)(ii)(D)(3)).

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