April 24, 2017
Physicals for Top Executives
Question: Our company would like to offer free comprehensive physical examinations as a fringe benefit for several top executives. Do any health care reform requirements limit our design options?
Answer: Yes, health care reform may affect executive physical programs. Such programs typically provide for a comprehensive annual exam that includes more diagnostic tests than a standard well-adult visit. For example, in addition to a physical exam and standard lab tests, an executive physical might include an electrocardiogram, visual acuity test, auditory exam, pulmonary health evaluation, a bone density test and other services. Because these services constitute medical care, the programs are considered group health plans for under the Internal Revenue Code, ERISA, and the Public Health Services Act.
As group health plans, executive physical programs are subject to certain health care reform mandates—which they may be unable to satisfy on a stand-alone basis. For example, an executive physical program might be unable, on its own, to satisfy health care reform’s preventive health services mandate applicable to non-grandfathered health plans.
The physical examination and diagnostic testing would certainly be preventive care services, but the program might not offer coverage for the full range of preventive care services required by health care reform (for example, counseling relating to smoking cessation, weight loss, depression, and alcohol use, as well as a broad range of women’s health services).
In addition, if the program imposes any annual dollar limit on the benefit (for example, a maximum reimbursement amount), it would likely violate health care reform’s prohibition on annual dollar limits, since preventive care services generally are essential health benefits subject to this prohibition. Thus, unless an executive physical program serves only retired executives, or provides only excepted benefits, it’s unlikely to satisfy health care reform mandates on a stand-alone basis.
To address these concerns, an executive physical program could be designed to be delivered through another group health plan sponsored by the employer (such as your major medical plan) that already complies with the health care reform mandates. In other words, the executive physical program would be a benefit delivered under a compliant group health plan, but available only to a select group of employees.
That benefit would presumably be available only to highly compensated individuals, but it could avoid running afoul of the Code Section 105(h) nondiscrimination rules if it is limited to those medical diagnostic procedures for employees that are not considered part of a self-insured health plan for purposes of nondiscrimination testing.
Alternatively, you might consider a defined contribution approach. For example, you could provide an executive physical benefit through a Health Reimbursement Arrangement (HRA). Your company could credit a certain amount of money to each executive’s HRA annually, and those funds would be available only to reimburse expenses for services that the company had defined as part of the executive physical program.
However, to comply with health care reform’s rule prohibiting annual dollar limits on essential health benefits (and with the preventive health services mandate), the HRA would need to be integrated with other group health plan coverage (such as the company’s major medical plan) that provides minimum value. (And, as noted above, to avoid nondiscrimination testing concerns, it would need to reimburse only those medical diagnostic procedures that aren’t subject to testing under Code Section 105(h).)
Another defined contribution approach — for executives with high-deductible health plan coverage — would be to increase the executives’ compensation and facilitate their voluntary contributions to Health Savings Accounts (HSAs) on a pre-tax basis through the company’s cafeteria plan, and the executives could use their HSAs to pay for their own physical examinations.
While in this scenario, the employer couldn’t control whether HSA contributions are actually made and how HSA funds are spent, it still may be effective if the executives understand the importance of the exams and the value of a truly comprehensive examination (that is, one that isn’t constrained by the boundaries of the medical diagnostic procedures exception under Code Section 105(h)).
Question: Under our company’s cafeteria plan, participants who are eligible for Health Savings Accounts (HSAs) can make pre-tax salary reduction contributions to their HSAs.
Can our company make matching contributions based on a percentage of participants’ pre-tax HSA contributions?
Answer: Probably. Some employers’ HSA contributions are subject to strict comparability requirements that effectively prohibit matching contributions because the contributions would trigger a 35% excise tax on the employer.
To be comparable, contributions generally must be the same dollar amount or the same percentage of the high-deductible health plan (HDHP) deductible, a standard that matching contributions cannot satisfy.
The comparability requirements don’t apply to employer HSA contributions that are made “through a cafeteria plan.”
Because your company’s cafeteria plan permits HSA-eligible participants to make pre-tax salary reduction contributions to their HSAs, any matching (or other) employer contributions made by your company would also be treated as made “through a cafeteria plan.”
Instead of comparability, your company’s contributions would be subject to the Code Section 125 nondiscrimination requirements — the eligibility, contributions and benefits, and key employee concentration tests.
Participants’ pre-tax HSA contributions are also subject to these rules.
In general, those tests provide more flexibility for employers wishing to vary HSA contributions on a nondiscriminatory basis, but even that flexibility has its limits.
As an example, if non-key employees do not contribute or make only small contributions, contributions by key employees could cause the cafeteria plan to fail the key employee concentration test. Thus, any matching contribution should be carefully designed to satisfy the applicable nondiscrimination rules.
Matching HSA contributions (like other employer HSA contributions) generally are treated as employer-provided coverage for medical expenses under an accident or health plan and are excludable from a participant’s gross income.
They also will be taken into account when determining whether your company is subject to health care reform’s excise tax on high-cost health coverage (the so-called “Cadillac tax,” which has yet to take effect).
Once your company’s matching HSA contributions are made, they are nonforfeitable. They cannot be subject to a vesting schedule or be returned to the employer if the participant terminates employment midyear.
Contributions Have Limits
Keep in mind that HSA contributions are subject to annual dollar limitations. All contributions that are made for a year to a participant’s HSA — whether by the participant, your company, or another entity or individual — must be aggregated for purposes of applying these limits.
If your company decides to make matching HSA contributions, this should be reflected in the cafeteria plan document, the cafeteria plan summary, and other applicable employee communications (for example, open enrollment materials).