Employers vet benefits vendors by running four tests before they sign: confirm who carries the responsibility, treat a required nondisclosure agreement as a warning, ask whether major accounting firms use the structure, and price the bundled services on the open market. Then write down why you chose. That record makes the decision defensible.
Why does vetting vendors matter more now?
Cost pressure is driving employers toward new programs. KFF’s 2025 Employer Health Benefits Survey put the average annual premium for family coverage at $26,993, up 6% in a year, and single coverage at $9,325. Where employers look for relief, vendors follow, and the line between a compliant new idea and an illegal one is not always clear from the sales deck.
On Episode 88 of The Business of Benefits from Ethos Benefits, Chelsea Ryckis talked with Chris Vanderwolk, an ERISA attorney who worked as a carrier account manager, sales rep and TPA operator before law school. His baseline for any vendor worth keeping: it will tell you plainly what it makes money on, what it does not, and how. The four tests below come from that conversation.
What does the pitch usually look like?
The version Chris sees most often arrives by email to midsize employers. The program takes $1,200 a month from the employee pretax, charges the employee $200 and the employer $50, and returns $1,000 a month to the employee tax-free. It is usually labeled a wellness program, a self-insured medical reimbursement plan or a fixed indemnity plan, with telemedicine, free generic drugs or a wellness activity attached. Everyone appears to save on payroll taxes.
One word takes it apart: reimbursement. Medical plans, HRAs and FSAs can pay benefits tax-free because they pay a provider for care or reimburse an actual out-of-pocket expense. In these structures nobody spent anything, so there is nothing to reimburse.
The IRS reached the same conclusion in Chief Counsel Advice 202323006, released June 9, 2023. It examined a fixed indemnity policy, paid for through pretax salary reduction, that paid $1,000 (up to once a month) when an employee completed a health or wellness activity. Because the payments did not depend on any unreimbursed medical expense, the IRS said they were includible in gross income and were wages for FICA, FUTA and federal income tax withholding.
Vendor compliance memos often explain the real rules accurately, then skip the one gap the program depends on.
Test 1: Who actually carries the responsibility?
The plan sponsor does. Under ERISA section 404, fiduciaries must act prudently and solely in the interest of participants, and that includes choosing and monitoring the people who act for the plan. It does not matter whether the broker, the consultant, the TPA or the vendor brought the idea in. Chris put it this way on the episode: “You can delegate authority, but you can’t delegate responsibility.”
Picking the expert is itself a choice you answer for, so the record of how you picked matters as much as the pick. Ask whether your committee has a written record for each vendor added in the last three years. If not, that is the first gap to close, and our CFO fiduciary playbook shows what that record should hold.
Test 2: Why would a vendor need an NDA?
Some promoters require a nondisclosure agreement before you can read their compliance memo. Chris calls that one of the first red flags. The tax code is public, and nobody has a unique ability to operate within it. An interpretation of tax law cannot be proprietary: a structure is either legal or it is not.
An NDA on a compliance memo limits how many trained eyes ever see it. Treat the request itself as the answer, and ask your own counsel to read the memo before you go further.
Test 3: Are the major accounting firms doing it?
For anything that depends on a tax position, ask your accountant whether the largest accounting firms use the structure for their own clients. If they do not, find out why.
Sometimes the honest answer is that you are early. Employers who started self-funding years ago were outside the norm before the market caught up. But early means the mainstream has not caught up yet. It does not mean thousands of tax professionals missed a legal way to hand employers free money. Chris adds one more filter: consider who is selling it, and what they were selling three years ago.
Test 4: What would the bundle cost on its own?
ERISA section 408(b)(2) asks two questions about every fee a plan pays: is the compensation disclosed, and is it reasonable? Since the Consolidated Appropriations Act, 2021, brokers and consultants to group health plans who expect $1,000 or more in compensation must disclose it in writing, as the Department of Labor explains in Field Assistance Bulletin 2021-03. Our guide to broker compensation disclosure covers what that document must show.
Reasonable is not a matter of opinion. The benchmark is what the same services cost on the open market. On the episode, Chris said he had priced the telemedicine package at the center of these programs at about $8 per employee per month. Set that against the pitch above, where $250 per employee per month leaves the system, and ask what the rest buys. You would not approve a software contract at that multiple without asking why, and your health plan is a bigger line item than your software.
Our vendor management work puts this comparison in front of the committee for every vendor, and vendor procurement prices the alternatives before you sign.
What happens when a scheme unwinds?
The first scheme to reach Chris’s desk was Classic 105, a medical reimbursement account program run by The Total Financial Group in Louisiana. He told the broker who brought it to him that she would end up in jail if she sold it. She listened. The promoters kept selling.
On March 17, 2022, a federal judge in the Eastern District of Louisiana sentenced Denis Joachim to 97 months in prison and Donna Joachim to 12 months and a day, according to the IRS Criminal Investigation release. The release says the company took in at least $25.5 million in fees and caused an underpayment of at least $23.3 million in federal FICA taxes. It also lists other unpaid taxes “for which the employer-clients and employee-participants may be individually responsible.”
The promoter is gone, and the bill can stay with the employer and its people. Many of those employees earn hourly wages and spend every paycheck. A back tax bill two years later is a real hardship, and underpaid payroll taxes can also affect what they later collect from Social Security.
How careful do you need to be?
Less fearful than the market suggests, and more organized than most employers are. Chris’s advice at the end of the episode was steady: have a process, write down your decisions, and you are most of the way there. In his experience, regulators tend to be reasonable with a reasonable person trying to do the right thing, though he was clear that is not a guarantee.
Most employers who worry they are behind lack documentation, not sophistication. Before the next program goes live, write down three things:
- What problem it solves for your plan.
- How the vendor is paid, in dollars.
- What you compared it with, and why you chose it.
That record turns a judgment call into a defensible one, and it is the backbone of the Fiduciary Framework™. Kalos Services applied the same discipline when it replaced its administrator, stop-loss, network and PBM in one year; the Kalos Services case study shows the results. For the rules on which plans ERISA covers, see ERISA vs. non-ERISA plans.
This article is general information, not legal or tax advice.
