Tax-Free Reimbursements to HCEs - Plans Out There Seem Suspicious

[Guest mel_2_22]

I recently came across a company called Exec-U-Care that is designed as "Supplemental Medical Reimbursement Insurance". I looked over their brochure, and it claims that you can reimburse HCE medical expenses tax-free. Furthermore, it goes on to state " "Exec-U-Care" is designed to give you the freedom to reward those employees you feel are most deserving". This sounds like a red flag to me. If you are trying to be discriminatory, you're probably discriminatory, right?

Here is my thinking: If this was really a win-win situation for employers to cover HCEs, then (a) why isn't EVERYONE doing it? and (b) Isn't it only a matter of time before the IRS comes after them?

My question is, how are they doing this? Is this legal? If so, what IRC is this governed by and what types of requirements are they subject to? This seems to go against almost everything I have ever been told about employee benefits.

I'm quite perplexed by this. It seems to be an interesting topic and something to look into, but i am still more than a bit suspicious.... . I would greatly appreciate any thoughts on this.

For more information, the website is www.exec-u-care.com .

[J Simmons]

The nondiscrimination rules applicable to medical reimbursement by an employer (IRC sec 105(h)) apply to self-insured medical reimbursement plans. Treas Reg sec 1.105-11(b)(1)(i) defines that to be

A self-insured medical reimbursement plan is a separate written plan for the benefit of employees which provides for reimbursement of employee medical expenses referred to in section 105(b). A plan or arrangement is self-insured unless reimbursement is provided under an individual or group policy of accident or health insurance issued by a licensed insurance company or under an arrangement in the nature of a prepaid health care plan that is regulated under federal or state law in a manner similar to the regulation of insurance companies. Thus, for example, a plan of a health maintenance organization, established under the Health Maintenance Organization Act of 1973, would qualify as a prepaid health care plan. In addition, this section applies to a self-insured medical reimbursement plan, determined in accordance with the rules of this section, maintained by an employee organization described in section 501©(9).

From a quick read of the Exec-U-Care brochure, under the heading "Will Employees Pay Taxes on Benefits?" it is provided

When you use Exec-U-Care as the funding vehicle for your medical reimbursement plan, benefits are not taxable to recipients in most situations. This is just one of the advantages of an insured plan over a self-funded plan. Payments under a discriminatory self-insured medical reimbursement plan are taxable, but payments under an insured medical reimbursement plan like Exec-U-Care are generally exempt from taxation.

It's always good to be skeptical and scrutinize a new idea. Here, the use of 'medical reimbursement plan' (albeit right after the word 'insured') instead of simply calling it a specialized, supplemental health insurance policy is what likely brought the discrimination concern to mind.

If it's truly insured--and from my quick read I have no reason to doubt that it is--the Exec-U-Care program would be tax-free to the executive under IRC sec 106(a), for which no nondiscrimination requirement applies.

[Ron Snyder]

We discussed this arrangement in some detail on this board about 2 years ago.

[Guest mel_2_22]

J Simmons,

Thank you so much for your reply. That really helps a lot.

Vebaguru,

Do you happen to recall what heading I might find the old posts under?

Thanks again guys.

- Mel

[GBurns]

The threads will probably be found if you search for Exec-u-Care.