The Complete Definition and Why the IRS Objects
A "double dip" is a tax structure where an employer attempts to claim tax advantages on both the premium payment AND the benefit payment from the same insurance policy funded entirely with pre-tax dollars.
Specifically: premiums are paid through pre-tax salary reduction (avoiding FICA on those dollars), and then the benefits paid out are also claimed as tax-free—even though no after-tax employee contribution was ever made.
Here's the specific structure the IRS has challenged:
The IRS objects because the employer is getting tax advantages on both ends of the same dollar flow:
The tax code provides two different frameworks for health insurance benefits, but they're mutually exclusive:
When the employer pays premiums (or premiums are paid pre-tax through §125), the coverage is excludable under §106, but benefits are only excludable under §105(b) to the extent they reimburse actual medical expenses. Excess benefits—payments beyond actual expenses—are taxable.
When the employee pays premiums with after-tax dollars, benefits are excludable under §104(a)(3) without regard to whether they exceed actual medical expenses. The "excess benefit" problem doesn't apply because the employee funded the policy.
The "double dip" tries to use Framework 1 for the premium (pre-tax exclusion) and Framework 2 for the benefit (tax-free regardless of expenses). The IRS says you can't mix and match—you have to pick one framework based on how the premium is funded.
The term is often misused to attack any wellness program that provides FICA savings. But "double dip" has a specific meaning:
The "double dip" concept originates from Revenue Ruling 2002-3, which addressed a specific scheme where employers reimbursed employees for health insurance premiums that had been paid through pre-tax salary reduction.
"The exclusions under sections 106(a) and 105(b) do not apply to amounts that the employer pays to employees to reimburse the employees for amounts paid by the employees for health insurance coverage that was excluded from gross income under section 106(a) (including salary reduction amounts pursuant to a cafeteria plan under section 125 that are applied to pay for such coverage)."
— Revenue Ruling 2002-3
The ruling established that you can't reimburse pre-tax premiums and claim the reimbursement is also excludable. The same principle underlies the IRS position on wellness "double dip" arrangements.
A dual-premium structure avoids the double dip problem entirely by using two separate policies with two separate premium streams:
There's no "double dip" because each policy stands on its own legal foundation. The wellness benefits aren't coming from the pre-tax funded policy—they're coming from the after-tax funded policy.
The PTE Gold Book provides comprehensive analysis of double dip structures, dual-premium alternatives, and the complete IRS guidance history.