Since you asked: Can an employer offer executive physicals as taxable perks?

Question

Can an employer provide senior staff an executive physical using a “taxable perk”?

Answer

Yes, but making this perk taxable doesn’t mean it isn’t a group health plan. Executive physical programs offered to more than one employee would be a group health plan, subject to all the applicable laws and regulations.

‘Taxable perk’ scenario

Some employers choose to cover the cost of an annual physical for their executive and senior-level staff as a perk to attract and retain key talent. The physical would typically consist of preventive care visits that evaluate key clinical indicators. The exams can be relatively comprehensive, including labs, imaging and other optional services, given over a period of time ranging from a half day to three days, depending on the scope. The executive then typically meets with a physician to discuss results and develop a plan for follow-up care, if needed. This follow-up care is not part of the executive physical but may be covered under the employer’s major medical plan if the executive participates.

Under a taxable perk scenario, the executive would not need to be covered under the employer’s major medical plan. Instead, the executive would receive a preventive physical exam from a health provider and then submit the bill for the exam to the employer for reimbursement from the employer’s general assets. There would be no deductibles, copays, coinsurance or any other cost sharing. The reimbursement would be included in the executive’s gross income and subjected to income and employment taxes.

Compliance

Companies must consider a variety of compliance issues before deciding to provide executive physicals to executives and senior-level staff.

Tax considerations

Under the IRS tax code, all payments made to an employee by an employer are taxable, with some exceptions, including amounts reimbursed for qualified medical expenses through a self-insured employer-sponsored group health plan. In the taxable perk scenario described above, where the employer is reimbursing employees for qualified medical expenses they incurred and substantiated, the taxable perk would appear to be a tax-free benefit; however, because the taxable perk is only available to highly compensated employees, the tax code’s non-discrimination rules would also apply.

The non-discrimination rules contain an exception that allows benefits for “medical diagnostic procedures” to be paid to highly compensated individuals without providing the same benefits to non-highly compensated individuals, if the following three conditions are met:

1. The procedures are performed at a facility that only provides medical or ancillary services.
2. The procedures are for routine medical examinations, blood tests and X-rays or similar tests.
3. The procedures do not include expenses incurred for the treatment, cure or testing of a known illness or disability, or the treatment or testing for a physical injury, complaint or specific symptom of a bodily malfunction.

This means that an executive physical program featuring routine medical examinations, blood tests and X-rays may not be subject to the tax code’s non-discrimination rules; however, if the services extend to treatment, cure or testing of a known illness or disability, the non-discrimination rules likely will apply.

Providing this program as a taxable benefit would avoid the non-discrimination concerns; however, other concerns must be considered relating to group health plans.

Group health plan considerations

The taxable perk scenario (i.e., an employee is reimbursed by the employer for a medical exam) likely creates a group health plan — not only under the tax code but also under various other employee benefit laws, for example:

• ERISA: Plan documents, summary plan descriptions, Forms 5500, and other disclosures and reporting would be required.
• Affordable Care Act (ACA): Certain other benefits would be mandated, including coverage of preventive care that may not otherwise be covered under the taxable perk program (the stand-alone executive physical program likely would not satisfy ACA mandates).
• COBRA: Continuation of the executive physical program would need to be offered to executives incurring a COBRA qualifying event.
• Health savings account (HSA) eligibility: An executive physical program that only provides preventive services, as defined by the ACA and the tax code, would allow the executives to remain eligible to participate in an HSA; however, if the program provides non-preventive services for free, prior to the executive meeting the minimum annual deductible required for HSA-qualified high-deductible health plans, the executive would not be eligible to contribute to his or her HSA unless the program charges fair market value for those services.

Takeaways

• Executive physical programs can be more complex than they appear. Numerous laws can affect the program design from both a tax standpoint and a group health plan standpoint. Employers must consider multiple compliance issues before implementing a program.
• Merely “taxing” a reimbursement of medical expenses as a benefit does not exempt the benefit from meeting the requirements of other laws that apply to group health plans.