Health Benefits Under A Top Hat Plan - 105(h) Issue, or Not?

[Christine Roberts]

Presume a top hat nonqualified deferred compensation plan that contains language entitling a participant to receive group or individual health insurance at the Company’s expense for the remainder of the participant’s life following retirement or disability, and extends this benefit to the participant’s surviving spouse for her lifetime if the participant dies after becoming eligible for full retirement.

Does this present a discrimination problem under IRC Sec. 105(h)?

And does it trigger the FASB standards applicable to retiree medical expenses?

Any comments appreciated.

[RTK]

Re 105(h). Could be an issue depending upon deal. For executive retiree medical benefits, I think generally that the payment of premium to a fully insured medical plan to provide medical benefit coverage and medical benefits for an executive retiree would not raise any 105(h) issues, while the payment of medical benefits to an executive retiree on a self-insured plan would.

[Christine Roberts]

RTK, thanks for the response, but I am not sure I understand the distinction you draw.

Sec. 105(h) refers to reimbursement of medical expenses, and medical expenses do not include premiums for any type of health/medical insurance.

Are you viewing provision of self-insured care as expense reimbursement?

Please excuse my dense-ness.

[RTK]

I view 105(h) this way.

If medical benefits are paid under a self-insured medical reimbursement plan, a 105(h) issue exists. If a discriminatory plan, generally the medical benefits are included in the highly compensated income. I do not believe that the mere provision of the self insured medical benefit coverage is taxable under 105(h), only the actual medical benefits paid. Thus, if the executive receives health insurance under a discriminatory self-insured plan, the executive would be taxed on any medical benefits paid, but should not be taxed on the coverage.

This is in contrast to providing medical benefits under a fully insured plan to executives. There 105(h) would not be an issue, and the cost of coverage and the medical benefits paid would be excluded from the executive's income.

[Christine Roberts]

Thanks, this helps quite a bit.

Any comments on the FASB issue? Or is the duty to track retirement health benefits as a liability for balance sheet purposes only in effect when such benefits are offered to a large class of employees.

[RTK]

Fortunately or unfortunately, FASB is a mystery to me.