🚨 Buyer Beware! The Newest Staffing Fraud Scam … “Wellness Plans”

There’s a new scam spreading fast through California’s staffing industry — and it’s dressed up to look legitimate.
They call them “Employee Wellness Plans.”
But make no mistake — these so-called “tax-saving” wellness programs are the newest wave of payroll tax and insurance fraud sweeping through the temporary staffing world.

The Pitch: “Save on Taxes, Boost Take-Home Pay”

Fraudulent promoters are targeting staffing agencies and small employers with offers that sound too good to be true:

“Cut payroll taxes. Give your employees more take-home pay. Everyone wins!”

They claim their “Section 125 Wellness Plan” or “Wellness Indemnity Benefit” is a compliant health program that helps both sides save big. In reality, it’s a wage-reclassification scheme — one that’s already on the IRS and Department of Labor’s radar.

How the Scam Works

1. Reclassify wages – Employers label part of each paycheck as a “wellness benefit.”

2. Payroll deduction shell game – That money is routed to a vendor, then rebated back to employees as a so-called “tax-free reimbursement.”

3. Double dipping – Employers dodge FICA and FUTA taxes on that amount and still deduct it as a business expense.

4. Illusion of higher pay – Employees think they’re earning more because taxes weren’t withheld — until the IRS comes knocking.

This “circular cash flow” violates federal tax law (IRS CCAs 201703013 & 202323006) and California statutes on payroll reporting and insurance premiums.

Why It’s Fraudulent

• No true insurance risk – There’s no legitimate coverage; wages are simply recycled.

• Payroll tax evasion – Mislabeling wages as benefits to avoid taxes is illegal.

• Employee deception – Workers lose Social Security, unemployment, and workers’ comp contributions.

• Unfair competition – Honest staffing firms can’t compete with fraud-based pricing.

The Fallout

For employers:

• Retroactive IRS assessments for unpaid FICA/FUTA plus penalties and interest.

• California exposure under the Private Attorneys General Act (PAGA) and Business & Professions Code § 17200.

• Possible insurance-premium fraud charges (Cal. Ins. Code § 1871.7).

For employees:

• Surprise tax bills on “tax-free” reimbursements.

• Lower future benefits — smaller unemployment, disability, and retirement payments.

Red Flags to Watch

• Promises of “risk-free” tax savings for both employer and employee.

• Vendors pushing confidentiality or NDAs.

• Reimbursements for non-medical activities like gym visits or health surveys.

• Complex or vague legal explanations referencing “wellness” loopholes.

If it sounds like a tax cheat wrapped in HR language — it is.

The Bottom Line

These wellness plan tax shelters are just the latest form of staffing fraud — no different than payroll skimming or workers’ comp premium scams.
They hurt workers, rob taxpayers, and give fraudulent agencies an unfair edge over those who play by the rules.

Don’t fall for it.
Do your due diligence, verify any benefit plan with licensed counsel, and report suspicious programs to:
IRS Criminal Investigation, California Department of Insurance, or the Labor Commissioner’s Office.