Very Rich Executive Reimbursement Program

[Renafesq]

I have a non-profit client that provides a very rich taxable reimbursement program for its C-Suite.  They've been doing this for over 30 years. They provide annual amounts for which the execs can submit claims for reimbursement that vary based on title (CEOs get $80k whereas a VP may receive $20K). The reimbursement amounts are not limited to medical claims.  For example, execs can get reimbursed for payments to his mother's nursing home payments, CPA fees and legal fees.  There is no written plan, and only about half of the execs actually utilize the full benefits each year.  There are some who have never submitted any reimbursements. Because of the medical reimbursement, I'm certain there are GHP and ERISA implications as well as nondiscrimination issues under Code section 105(h).  I've suggested to the client that it's better to provide the amount as a discretionary cash bonus because of the medical reimbursement component and because the amounts are already taxable.  I'm receiving push back because the client has been advised that since the benefits are taxable, then the above ERISA, GHP, and 105(h) implications do not apply. They also do not want to actually commit to a specified bonus amount for those who have not utilized the funds. Is there anything else they can consider that wouldn't raise ERISA and other GHP issues?  Am I making a mountain out of a mole hill? Would there be nondiscrimination issues since the benefits are taxable?  Thanks in advance.

[Brian Gilmore]

I have also encountered this argument, and I agree with your take.  What they've done is created what I refer to as a "taxable HRA".  That's basically an oxymoron, but I don't know what else to call it. 

The one piece of the other adviser's argument I agree with is they avoid the §105(h) issues here by making the arrangement taxable.  I just disagree with everything else.  Any employer reimbursement of medical expenses with an ongoing administrative scheme is a group health plan.  Other than for purposes of determining whether the §105(h) rules apply, it doesn't matter whether those reimbursements take advantage of the otherwise available §105 exclusion from income.

That means this arrangement still needs to deal with:

• ERISA
• ACA
• COBRA
• HIPAA
• HSA (eligibility issues)

So I'm on your side on this one.  In my opinion, they've received some poor advice on this one.  Definitely more mountain than molehill until they strip out the medical components.

Here's my take:

https://www.newfront.com/blog/addressing-employee-health-plan-exception-requests-part-vi

Solution #2: Avoid Creating a Group Health Plan

Employers may have a strong desire to preserve the informal “one-off” exception-based approach to a specific employee request to address a medical expense outside the group heath plan.

The employer can always provide additional taxable cash compensation to employees that is not conditioned in any way on the employee’s actual medical expenses incurred.  For example, the employer can provide an employee experiencing unexpected medical expenses with a standard raise/bonus/stipend that is taxable and subject to withholding and payroll taxes.

These payments cannot be a direct or indirect reimbursement of any medical expenses incurred (taxable or non-taxable).  In other words, the employer could not determine the amount of the payment based on the actual medical expenses incurred by the employee, nor could the employer condition the additional payment on the employee’s submission of medical receipts. Any such form of reimbursement would trigger a group health plan and the issues outlined above.

• Note: Employers often question why they cannot simply reimburse medical benefits on a taxable basis to avoid application of the group health plan legal restrictions. However, reimbursement of medical expenses on a taxable basis would still be a group health plan subject to all the group health plan laws described above (with the exception of the §105(h) nondiscrimination testing requirements), and therefore it is also not a viable solution. That taxable reimbursement approach would no longer be an HRA because it would not be designed as a tax-advantaged vehicle under IRC §105 and §106, although some refer to the approach as a “taxable HRA” because it would still be a (non-tax advantaged) defined contribution group health plan arrangement.

...

Relevant Cites:

ERISA §733(a):

(a) Group health plan.
For purposes of this part— 


(1) In general. The term “group health plan” means an employee welfare benefit plan to the extent that the plan provides medical care (as defined in paragraph (2) and including items and services paid for as medical care) to employees or their dependents (as defined under the terms of the plan) directly or through insurance, reimbursement, or otherwise. Such term shall not include any qualified small employer health reimbursement arrangement (as defined in section 9831(d)(2) of the Internal Revenue Code of 1986).


Slide summary:

2024 Newfront Fringe Benefits for Employers Guide

[Renafesq]

Thank you so much.