Executive Physicals

[Guest caseyb]

We have an Executive Health Plan for 12 execs, unfunded, uninsured. In the past we have added the cost of the physical to the employee's imputed income and grossed it up for taxes. I was recently told it isn't taxable as it's diagnostic in nature, so we no longer need to pay the taxes on the benefit.

Also, I believe the number of eligible participants excludes it from a 5500 requirement.

Can you help me confirm both? Thanks!

[Guest Sieve]

I'd say you have a self-insured medical expense reimbursement plan (which only has one benefit) for 12 execs and no one else, so it seems to be discriminatory. That means the cost of the physical is includible in income to the extent of the discrimination. (See Code Section 105(h).) I don't see what diagnostic or not diagnostic has to do with it--it's still a health plan and it's still a medical expense. The definition of MERP in Code Section 105(h)(6) refers to Section 105(b), which says that "gross income does not include amounts . . . paid, directly or indirectly . . . to reimburse the taxpayer for expenses incurred . . . for the medical care (as defined in section 213(d)) of the tapayer . . .". And, Section 213(d)(1)(A) clearly defines "medical care" to cover "diagnosis . . . of disease". We all include our own payments to a medical provider for a physical as a Section 213 potentially-deductible medical expenses when we do our personal income tax returns.

[Guest lltwin]

There is a carve out from the nondiscrimination requirements of 105(h) for certain executive physicals in regulation Section 1.105-11(g). If the requirements are met, the amounts reimbursed may be excludable from the employees income.

[Guest Sieve]

I stand corrected. Learn something new every day!

[GBurns]

lltwin

An excellent first post. I hope to see many more.

Welcome to the fray.

[Chaz]

N.B. Notwithstanding the nontaxability of the physicals, if the employer is a public company, to the extent that the executives are "named executive officers," the amounts must be disclosed in the company's proxy statement in the Summary Compensation Table.

[Guest katefen]

what about executive physicals and high deductible health plans. Does an executive physical plan preclude the executive's participation in a high deductible health plan? Is the only option to provide the executive with taxable compensation to cover the cost of the physical?

[401 Chaos]

I see where Treas. Reg. 1.105-11(g) seemingly carves out from the general exemption coverage for dependents. Do I read this correctly to provide that if an employer pays for executive physicals / medical exams for a select group of top hat executives and their spouses, then the amounts paid for executives can be paid by the employer and excluded from the executives' income; however, the amounts paid for spouses will be essentially considered a discriminatory self-insured health plan benefit and thus result in the value / cost of the exam being deemed taxable income to the executives?

[401 Chaos]

Question regarding the exemption for diagnostic procedures under 1.105-11(g).

We understand some consultants have advised this exemption providing for non-taxability of these diagnostic exams may be called into question given the extension of nondiscrimination rules similar to those in 105(h) to fully-insured plans. I'm not sure that is correct, particularly given Notice 2011-1's delayed enforcement of the rules. It seems such xecutive physical programs are not fully insured arrangements in the way of some executive plans since they don't involve any risk shifting.

Without more express guidance / regulations, I see no reason to think health care reform's extension of nondiscrimination rules to fully insured arrangements would impact the treatment of these sorts of arrangement. Would appreciate any thoughts.

[Guest morris]

401 Chaos--agree with you. No effect on executive physical plans. Nothing has changed with 105(h)-11(g). So why would something that happens on the fully insured side (application of 105(h) rules) suddenly turn around and reverse those very same rules on the self insured side? Somebody has misunderstood the consultant or the consultant has misunderstood the changes.

Katefan--an executive physical plan would not preclude participation in a HDHP. I think you mean HSA. Same is true for the HSA. If this were true then all of the new "freebie" benefits under the Health Care Reform Act would automatically void/prevent all HSA participation/contributions.

[Guest EileenL]

Would the cost of a physical for an S Corp shareholder fall under the exeption or whould the shareholder have to include the cost in his income?

[Guest morris]

Eileen--my bet is that the S corp shareholder would have to include the cost in his income.

[Guest Little Archer]

I have some questions here.

Does an executive physical plan prevent the executive's contribution in a high insurance deductible health plan? Is the only choice to offer the professional with taxed settlement to protect the cost of the physical?