Compliance Q&A: Can We Pay for Executive Physicals?

Summary

Yes, but as with most things in benefits, you’ll need to think through the compliance considerations. Unfortunately, it’s not as easy as just reimbursing or paying the cost of the physical.

Although it seems like a small thing, simply paying or reimbursing for the cost of a physical would actually create a group health plan subject to ACA market reforms, since a physical is considered medical care. This plan would not satisfy ACA rules on a standalone basis (e.g., the preventive services coverage mandate, the prohibition against annual limits, etc.). And keep in mind the plan would also need to comply with other laws that apply to group health plans, e.g., ERISA and COBRA).

Detail

Plan Design Considerations

That said, there are a number of possible plan design options that may work for you. We have summarized the most popular ones in the bulleted section below, but you will want to work closely with your company’s employee benefits counsel to ensure the design avoids potential compliance potholes. This is particularly true for a design intended to meet the medical procedure diagnostic exception under the nondiscrimination provisions for self-funded group health plans found in tax code section 105(h).

• Provide executive physicals through your self-funded major medical plan and rely on the special rule exempting diagnostic tests from 105(h) nondiscrimination testing. To meet this exception, the physical must be performed at a facility that provides only medical or ancillary services and must only include routine medical examinations, blood tests, X-rays, or similar tests. Associated procedures cannot be 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.
• Create an HRA to reimburse the executive physicals for the selected executive population. To satisfy ACA rules (and ease compliance with ERISA and other applicable regulations) the HRA must be integrated with a compliant group health plan. Most employers do this by integrating it with their existing self-funded major medical plan. Once again, you would need to design the plan so that it could rely on the special rule exempting diagnostic tests from 105(h) nondiscrimination testing (since HRAs are generally self-funded group health plans subject to 105(h) nondiscrimination testing).
• If you offer an HDHP and facilitate HSA contributions, then raise the selected executive population’s pay with the idea that they can contribute more to their HSA and use it to pay for the physicals. While you cannot require the funds contributed to the HSA be used for the executive physical, this approach would allow executives to pay for them on a pre-tax basis and the physical itself wouldn’t have to satisfy the rules exempting diagnostic tests from 105(h) nondiscrimination testing.

Keep in mind that, depending on the approach you take, there may be additional action needed, such as plan amendments/plan documents, SPDs/SMMs, etc.

What if you want to go beyond the executive physical to provide supplemental medical coverage for executives?

In that case, there are a number of carriers that specialize in the area. To provide this type of coverage, you generally must do so through a fully insured product to avoid self-funded group health plan nondiscrimination testing issues under tax code section 105(h). However, these plans generally can avoid cafeteria plan testing issues since they are typically fully paid by the employer.

That said, there are a number of other compliance hurdles with these products. For example, most of these plans are considered an ‘excepted benefit,’ meaning they’re unaffected by ACA requirements. In particular, these plans are often designed to fit under the excepted benefit category of similar supplemental insurance coverage. In that case, the safe harbor rules require that the coverage:

• Be fully insured (and there must be a real shift of liability to the carrier)
• Fill gaps in the primary coverage
• Not exceed 15% of the cost of primary coverage
• Not differentiate among individuals in eligibility, benefits, or premiums based on any health factor of an individual

In the end, the determination of whether or not a plan is an excepted benefit is based on very specific facts.

Conclusion

If you want to provide supplemental health coverage to your executives rather than merely providing a physical, be sure to do your compliance-related due diligence with the potential vendor. You’ll want to ask whether the proposed plan intends to qualify as an excepted benefit or otherwise for ACA compliance purposes. Make sure the vendor provides relevant materials showing why they believe the plan meets the criteria to qualify. Even then, given the fact-specific nature of compliance in this area, you’ll likely want to run the program by your company’s employee benefits counsel to make sure they’re comfortable with the approach. Counsel can also provide guidance on other potential compliance considerations (e.g., top hat status for ERISA purposes, applicability of COBRA and so on).