cafeteria plan, HRA and Physician compensation

[Jeff Kirtner]

A physician group (a C corporation) wants to establish a health reimbursement arrangement (HRA). Like many other physician groups, the group initially pays expenses incurred by physicians, but then allocates the expenses directly to the physician who incurred the expense, and reduces that physician's compensation by the amount of expenses incurred by the physician. Thus, for example, if a physician incurs CME expenses of $3,000, the group pays the $3,000, but the physician's compensation is later reduced by $3,000. The group would like to apply the same method to an HRA they want to establish. Under the HRA, each employee would receive monthly credits of, say, $500, to an HRA Account, subject to a maximum balance of $4,000. The HRA would reimburse the physician from the physician's HRA Account for receipts turned in by the physician, but the group would then reduce the physician's compensation by the amount of reimbursements received by the physician under the HRA. Would such a plan violate the rules applicable to HRAs? Is the arrangement a cafeteria plan, even though there are no elections?

[GBurns]

What you have described looks very much like the old "Zero Balance" medical expense reimbursement plans that were outlawed around 1976 by the IRS via a Notice etc and subsequently by IRC section 125.

There should either be a section 125 FSA to which these Drs pre-tax an elected amount from which eligible medical expenses are reimbursed. OR there should be a Section 105 Medical Expense Reimbursement Plan from which the expenses that the Drs incur are reimbursed. The caveat being that a plan for the Drs only and not for all the staff might be disallowed under 105(h) anyhow.

There is no connection in a MERP with the Drs compensation. Recharacterization of income as per your description is what was addressed as "Zero Balance" or more recently as "Double-dipping".

An HRA is a section 105 MERP with employer only contributions and the "roll over" feature which would not seem applicable in this case. Or it is just like an FSA except ifor additional employee elections and the lack of the "roll over" but with "use it or lose it" instead.