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March 31, 2026
More and more employers are choosing to include “voluntary benefits” in the benefit package offered to eligible employees. Voluntary benefits may include coverage for a variety of things, including, but not limited to, dental, vision, life, disability, hospital indemnity, specific disease, or accidents. It is common that such benefits will be 100% employee paid. Although many employers assume there are no additional compliance obligations for these types of benefits, especially when the employer is not contributing, that is not always the case. In addition, tax rules may affect the ability to pay for premiums on a tax-favored basis, and in some cases affect the taxation of benefits received. Below is a high-level summary of the compliance considerations for employers choosing to offer voluntary benefits.
ERISA
Most employee benefit arrangements are “employee welfare benefit plans” covered by ERISA. There are exemptions for government, tribal, and church plans, as well as for employer-sponsored daycare centers. In addition, there is a safe harbor from ERISA requirements for voluntary plans when certain conditions are satisfied. However, the requirements of the safe harbor (found in DOL Reg. §2510.3- 1(j)), which may be difficult for most plans to satisfy, are outlined in the table below.
Determining whether the voluntary plan safe harbor applies is often difficult. In the end, it may be easier to assume that ERISA applies and to act accordingly (e.g., prepare a plan document, distribute a summary plan description (SPD), and file a Form 5500 as applicable). Employers that offer voluntary plans often offer other benefits subject to ERISA, in which case the voluntary benefits could be added to an employer’s wrap document and included in a Form 5500 filing (if required). Adding the voluntary plans to the list of benefits requiring ERISA compliance is typically less burdensome than ongoing monitoring of the safe harbor status. Employers may even benefit from their voluntary benefits being subject to ERISA, for example via the preemption from most state laws that ERISA provides.
Although voluntary benefits are frequently marketed and administered under the assumption that they fall within ERISA’s voluntary plan safe harbor, emerging data suggests that more than 80% of worksite and voluntary benefit arrangements may actually be subject to ERISA. Furthermore, the modern wave of fiduciary litigation has begun to target employer-sponsored health and welfare plans offering voluntary benefits, such as accident, critical illness, and hospital indemnity insurance. Although these © 2026 Apex Benefits Group. All Rights Reserved. 3 cases are still in their early stages, employers and their brokers/advisors do not need to wait for court rulings to begin mitigating risk. Practical steps such groups can take now include:
- Re-evaluating whether voluntary benefit arrangements truly satisfy the ERISA safe harbor;
- Clarifying fiduciary status in engagement agreements; • Increasing compensation transparency, including commissions, overrides, and incentives;
- Developing/maintaining competitive selection processes, such as periodic RFPs or benchmarking;
- Documenting recommendations and decision rationales; and
- Avoiding practices that could be characterized as self-dealing, particularly where revenue considerations influence plan design or carrier selection.
COBRA
Group health plans, those that provide significant medical benefits (or health care), are generally subject to federal COBRA continuation requirements. If the voluntary benefits reimburse participants for healthcare costs, including dental or vision, COBRA will apply if the ERISA voluntary benefit safe harbor does not apply. And even if the ERISA safe harbor applies, COBRA might still apply “if coverage under the plan would not be available at the same cost to an individual but for the individual’s employmentrelated connection to the employer.” In other words, if there is uncertainty about whether the ERISA safe harbor applies, and/or if the premium is discounted because of the employment relationship, the plan may be subject to COBRA if the coverage reimburses participants for healthcare costs (e.g., medical, dental, vision, etc.). If COBRA does apply, employers should discuss with the carrier how this will be handled for such benefits.
COBRA does not apply for life, disability, long-term care insurance, or other non-health coverage. Fixed indemnity plans that provide a pre-set amount of money in the event of certain medical situations or events (e.g., $100 per day for hospital stays or a fixed payment for a certain medical condition) are generally not subject to COBRA because they do not reimburse the actual cost of the care.
Taxation
Not all benefits qualify for tax-favored treatment under federal tax law. Some benefits are subject to limitations for tax purposes. For other benefits, the taxation of any benefits received is tied to whether the premiums were handled on a tax-favored basis. The taxation for a few common benefits is described below.
Life Insurance
Life insurance premiums for the life of an employee may be handled on a tax-favored basis for a value of up to $50,000, but additional coverage must be paid for after-tax or imputed as additional income.
Disability Benefits
Premiums for disability benefits are permitted to be handled on a tax-favored basis. However, if the premiums are handled on a tax-favored basis, the disability benefits will be taxable when received. If instead any employer contributions are imputed as taxable income to the employee and any employee contributions are made after-tax, then the disability benefits are not taxable when received.
Fixed Indemnity
Coverage Premiums for fixed indemnity coverage are permitted to be handled on a tax-favored basis. However, if the premiums are handled on a tax-favored basis, any indemnity payment may be taxable to the extent it exceeds the medical costs incurred. If instead any employer contributions are imputed as additional taxable income to the employee and any employee contributions are made after-tax, then the indemnity payment is not taxable when received.
Wellness Programs
Some benefit packages combine a variety of wellness incentives, preventive care, telehealth, and indemnity coverage that is intended to reduce employees’ taxable income. While preventive care and telehealth benefits are reimbursable on a tax-favored basis, wellness incentives are only excludable from an employee’s income if they pay for, or reimburse, qualifying medical care. Payments or reimbursements for participating in a wellness program do not qualify for tax-favored treatment and should be included in employees’ taxable income. In addition, as described above, if fixed indemnity plan premiums are handled on a tax-favored basis, any fixed indemnity payments may be taxable upon receipt to the extent they exceed actual medical costs incurred.
When choosing to offer voluntary benefits, whether paid for by the employer, the employee, or both, employers should ensure that taxation for the premiums and benefit payments is handled appropriately. Although it may be attractive to offer all benefits, including voluntary benefits, through a cafeteria plan, it may be necessary to handle some of the premiums on an after-tax basis (or impute them as additional income).