A company provides a group health plan to its employees through a cafeteria plan. The benefits of the group health plan are fully insured. Both the group health plan and the cafeteria plan pass applicable nondiscrimination tests.

The company wants to give its executives (all of whom are HCEs) the opportunity to take an annual physical on a strictly voluntary basis. This physical is not provided by the medical insurance purchased by the company for purposes of its group health plan. Instead, executives will take physicals at a hospital, and the company will pay the cost of the physicals to the hospital. The company will not receive any information regarding the physicals except that they have been taken.

No employees other than executives will be given the opportunity to take the annual physical at company expense.

1) Does this arrangement for executive physicals constitute a self-insured medical reimbursement plan within the meaning of Code Sec. 105(h)(6)?

2) Is it per se discriminatory?

3) Could the cost of the physical be justified as an ordinary and necessary business expense and therefore beyond the scope of Code Secs. 105/106?

4) If the arrangement is a self-insured medical reimbursement plan and is discriminatory, is the consequence merely that the cost of the physicals would be includible in compensation for the executives?

Thank you.

John

Here are my own conclusions to my questions. If you have different conclusions, please let me know.

1) Does this arrangement for executive physicals constitute a self-insured medical reimbursement plan within the meaning of Code Sec. 105(h)(6)?

Yes.

2) Is it per se discriminatory?

Yes (Code Sec. 105(h)(2)).

3) Could the cost of the physical be justified as an ordinary and necessary business expense and therefore beyond the scope of Code Secs. 105/106?

No. The cost of the physicals are includible in the income of executives under Code Sec. 105(h)(1).

4) If the arrangement is a self-insured medical reimbursement plan and is discriminatory, is the consequence merely that the cost of the physicals would be includible in compensation for the executives?

Probably, yes. Presumably, the cost of the physicals would be helpful to the purpose of the employer, an ordinary cost of employment, and therefore deductible to the employer under Code Sec. 162(a)(1). However, it is conceivable that the IRS could take the position that a completely voluntary physical is not a necessary cost of business and deny the deduction.

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Again, thank you for considering these issues, and please let me know if you have a different take.

John

If all else fails, read the regulations.

I'm pretty sure that the regs say that this arrangement works.

You're right.

See Treas. Reg. Sec. 1.105-11(g) Exception for medical diagnostic procedures. "[A]n employee's annual physical examination ... is not considered a part of the medical reimbursement plan and therefore is not subject to the nondiscrimination requirements."

Thanks.

John