Reimbursement of Annual Physicals under HRAs

By Larry Grudzien, J.D.

December 2012

A business is reimbursing its executives for the annual physical examinations under its Health Reimbursement Arrangement and no one else. Wouldn’t such a practice be discriminatory and taxable to the executives?

No.  Under Treasury Regulation Section 1.105-11(g), a special exception applies from the Code Section 105(h) nondiscrimination rules for reimbursements paid for medical diagnostic procedures for a highly compensated individual.  Reimbursements of these expenses are not considered part of the self-insured health plan.

For example, the reimbursement of an employee’s annual physical examination conducted at the employee’s physician’s office is not considered part of the self-insured health plan (and thus is not subject to the Code Section 105(h) rules). An employer can rely on this exception to provide free “executive physicals” to certain employees, often including only highly compensated individuals.

This is permitted discrimination in favor of highly compensated individuals for a narrowly defined type of expense. The exception does not apply to an employee’s dependents.

The allowable procedures include routine medical examinations, blood tests, and X-rays. They do not include expenses for the treatment, cure, or testing of a known illness, disability, or physical injury. Thus, a routine dental examination with X-rays qualifies, but X-rays and treatment for a specific dental problem do not.

In addition, such procedures do not include activities undertaken for exercise, fitness, nutrition, recreation, or general improvement of health unless they are for medical care, as provided in Treasury Regulation Section 1.105-11(g). The diagnostic procedures must be performed at a facility that provides no services other than medical and ancillary services. Physical proximity between a medical and non-medical facility does not necessarily mean that the medical facility will not qualify. Transportation expenses that are primarily for the diagnostic procedure (but not incidental expenses for food or lodging) are allowed only if they are “ordinary and necessary,” as provided in Treasury Regulation Section 1.105-11(g).

Be careful because this exception is narrow.

A link to Treasury Regulation Section 1.105-11 is provided below:
http://www.gpo.gov/fdsys/pkg/CFR-2012-title26-vol2/pdf/CFR-2012-title26-vol2-sec1-105-11.pdf

Larry Grudzien is an attorney practicing exclusively in the field of employee benefits. He has experience in dealing with qualified plans, health and welfare, fringe benefits and executive compensation areas. He has more than 35 years of experience in employee benefit law and is an adjunct faculty member of John Marshall Law School’s LL.M. program in employee benefits and at the Valparaiso University School of Law, where he teaches a number of courses.