Executive Health Benefits

Question: How can employers offer executive physical programs and medical reimbursement benefits in a manner that complies with employee benefit laws?

Short Answer: Benefit plans designed specifically for executives and other key employees are becoming increasingly common. There are many ways to “thread the needle” to offer generous and meaningful executive benefits while complying with the applicable nondiscrimination and employee benefits laws.

Starting Point: Class-Based Health Plan Terms
Employers often will seek to offer different plan benefits or design different contribution strategies for certain classes of employees based on a variety of factors.

Common classes for whom employers may consider having different health benefit strategies include:

• Geographic region

• Hourly vs. salaried

• Exempt vs. non-exempt

• Type of work performed

• Job classification

• Contingent workforce

• Temps and interns

• Full-time vs. part-time

• Executives or other similar key employees

Common health plan distinctions for such classes include:

• Different eligibility conditions

• Different waiting period

• Different benefit options

• Excluding certain benefits for classes

• Dependent eligibility differences by class

• Contribution strategies by class

• Limiting health plan options to specific classes

For more details: Health Benefits by Class

Executive Physical Programs
Many employers offer an executive physical benefit that creates personalized health assessments designed to promote the well-being of corporate officers and select senior-level or key employees. These programs typically go beyond standard health screenings available under the major medical plan and are tailored to the unique health risks and needs (as well as demanding schedules) of executives.

Executive physical programs generally offer some combination of the following:

• In-depth physical exams conducted by specialized physicians, often at premier medical facilities or through partnerships with executive health clinics (e.g., Mayo Clinic, Cleveland Clinic, Stanford Concierge).

• Assessments of bloodwork, cardiovascular screenings, cancer screenings, vision/hearing tests, and stress tests.

• Advanced diagnostics like full-body imaging (e.g., MRI/CT scans) to detect early signs of disease.

• Detailed results with actionable recommendations, including lifestyle changes, preventive measures, or follow-up care.

• One-on-one consultation with a physician to discuss findings and create a personalized health plan.

• Emphasis on early detection of conditions like heart disease, diabetes, or cancer, which are critical for executives with high-stress roles.

• Screenings for mental health, stress, and burnout, sometimes with access to counseling or wellness coaching.

Often there are concierge-like services such as special access to facilities, minimal wait times, and coordinated appointments to accommodate executives’ busy schedules.

Section 105(h) Nondiscrimination Exemption
Executive physical programs are generally self-insured even if the major medical plan is fully insured. They are usually programs where the plan will directly pay for or reimburse certain preventive services annually. As a result, they are considered a self-insured benefit subject to the nondiscrimination rules in §105(h).

However, the §105(h) nondiscrimination rules for self-insured health plans contain a special exemption for executive physical programs. This means employers do not violate the nondiscrimination rules by making the program available only to executives.

To qualify for the nondiscrimination exemption, the program must be:

1. Limited to medical diagnostic procedures (e.g., routine medical examinations, blood tests, x-rays); and

2. Performed at a facility which provides only medical and ancillary services.

Furthermore, the program cannot include services for:

1. Treating, curing, or testing, a known illness or disability;

2. Treating or testing a physical injury, complaint, or specific symptom; or

3. Non-medical wellness to benefit general health (e.g., exercise, fitness, nutrition, recreation).

This exemption allows employers to provide tax-free executive physical benefits without the nondiscrimination issues that would otherwise arise for a self-insured health plan designed exclusively for executives.

• For more details: Newfront Compliance Considerations for Self-Insured Plans Guide

ERISA Requirements
The executive physical benefit provides medical care and therefore is an ERISA group health plan that requires a plan document and SPD. Employers may include the executive physical as a component of the standard health and welfare plan wrap document (typically plan 501) to avoid unnecessary additional documentation. The standard ERISA health plan claims and appeals procedures (typically delegated to a TPA) apply.

• For more details: Newfront ERISA for Employers Guide

COBRA Requirements
The executive physical benefit is a group health plan subject to COBRA. Anyone enrolled in the program at the time of a qualifying event (e.g., termination of employment) must be offered the ability to continue coverage in the COBRA election notice.

• For more details: Newfront COBRA for Employers Guide

HIPAA Privacy/Security Requirements
The executive physical benefit is a health plan subject to the HIPAA restrictions on the use and disclosure of PHI. Only those employees with a plan-related need to access PHI for plan administrative functions are permitted access to PHI. This ensures the privacy of the information and minimizes the risk of PHI being used for employment-related purposes, which HIPAA strictly prohibits.

• For more details: Newfront HIPAA Training for Employers Guide

HSA Compatibility
An executive physical program generally is limited to services that qualify as preventive care for HSA purposes. Accordingly, most of the time the offering will not affect HSA eligibility even if the benefit provides first-dollar (i.e., pre-HDHP deductible) coverage, per the standard structure for most executive physical arrangements.

• For more details: Newfront Go All the Way with HSA Guide

How to Provide Executive Physical Benefits: Standard Plan or HRA
Executive physicals can be offered in the standard health plan format whereby certain services are covered by the plan (generally fully covered in the case of an executive physical program) and the plan directly pays the provider for the covered amount. Alternatively, employers may offer an executive physical HRA whereby an annual/lifetime defined contribution amount is available for each eligible executive to reimburse qualifying physical expenses incurred. Either approach will generally require the assistance of a third-party administrator.

• For more details: Newfront Fringe Benefits for Employers Guide

Executive Physical Compliance Summary
An executive physical arrangement is a group health plan that must comply with group health plan laws such as ERISA, COBRA, and HIPAA. In some cases, the program is offered through an HRA. It can also be handled through a separate line of coverage (i.e., like medical, dental, vision, etc.) that is not designed as a defined contribution reimbursement arrangement. The executive physical can be added to the wrap documents like any other ERISA health and welfare benefit.

Whichever way the executive physical program is handled:

1. The §105(h) rules have an exemption for executive physicals to avoid nondiscrimination issues;

2. The program is therefore tax-free in the same manner as any standard health benefit; and

3. Because they are generally limited to preventive expenses only, executive physical benefits do not block HSA eligibility.

Executive Medical Reimbursement
Some employers consider going beyond the executive physical services to offer a broader reimbursement arrangement that covers all or some significant portion of the potential §213 qualifying health expenses.

Executive medical reimbursement programs may cover some combination of the following:

• Cost-sharing amounts (deductibles, co-insurance, co-pays)

• Out-of-network charges and balance bills

• Dental care (including adult and child orthodontia, crowns, bridges implants)

• Vision care (including glasses, contact lenses, LASIK surgery)

• Private hospital rooms

• Name brand prescriptions off formulary

• Mental health therapy and counseling

• Substance use disorder treatment

Section 105(h) Prevents Tax-Free Self-Insured Plan or HRA Offering
Employers are often interested in considering a self-insured health plan option or HRA to cover various out-of-pocket medical expenses incurred by executives. These types of arrangements do not comply with the §105(h) nondiscrimination rules that apply to self-insured (including HRA) health plans offered on a tax-advantaged basis. Nonetheless, this type of approach can be offered on a taxable basis to avoid nondiscrimination issues.

• 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. Reimbursement of medical expenses on a taxable basis is still subject to all the group health plan laws, other than the §105(h) nondiscrimination testing requirements. The taxable reimbursement approach is not technically an HRA because it is not designed as a tax-advantaged vehicle under IRC §105. Some refer to the approach as a “taxable HRA” because it is still a (non-tax advantaged) defined contribution group health plan arrangement.

Employers wishing to make executives “whole” of any of these types of executive medical reimbursement benefits can also consider offering a gross-up for the tax liability.

Fully Insured Supplemental Approach Can Avoid Nondiscrimination Rules
Employers do have the ability to offer a carefully designed program that is specifically designed to avoid application of nondiscrimination rules by structuring the arrangement to meet two key conditions:

1. Fully Insured: The §105(h) nondiscrimination rules apply only to self-insured plans. Accordingly, by structuring the executive reimbursement arrangement as a fully insured policy, the program avoids the §105(h) nondiscrimination rules that otherwise prohibit a tax-free self-insured plan or HRA offering.
   
   Note that the ACA added Public Health Service Act §2716, which provides that fully insured group health plans will be subject to rules “similar to” the §105(h) nondiscrimination requirements. These ACA rules technically were to apply at the same time as the first wave of the ACA market reforms, which was the first plan year beginning on or after September 23, 2010. However, the IRS issued Notice 2011-1 at the end of 2010 providing that employers are not required to comply with the new ACA fully insured nondiscrimination rules until the Departments issue regulations or other administrative guidance. The DOL and HHS indicated their agreement with the IRS to delay enforcement. The Notice further states that any such guidance will not apply until plan years beginning a specified period after issuance.

2. Excepted Benefit: Even if the ACA fully insured nondiscrimination rules ever take effect—which at this point appears quite dubious—a fully insured supplemental executive benefit can still avoid those rules by qualifying as an “excepted benefit.” Excepted benefits are not subject to the ACA market reform requirements, including the fully insured nondiscrimination rules. The most common types of excepted benefits are dental plans, vision plans, health FSAs, and EAPs. However, there is a lesser-known category of excepted benefits referred to as “supplemental benefits”.
   
   Supplemental benefits in this context are excepted benefits if they provide coverage similar to Medicare supplemental insurance, but in this case designed to supplement a group health plan. The rules refer to this type of benefit as “similar supplemental coverage” that is designed to “fill gaps in the primary coverage.” This includes cost-sharing amounts (deductibles, copayments, coinsurance) or benefits for items and services not covered by the primary coverage.
   
   DOL guidance establishes a safe harbor for satisfying this standard, which requires a) the insurance policy is issued by an entity other than the carrier providing the primary coverage, b) coverage is specifically designed to fill gaps in the primary coverage, c) the cost (using the COBRA premium) of the supplemental policy does not exceed 15% of the plan’s primary coverage, and d) the supplemental policy coverage does not differentiate based on a health factor of the participant.

Accordingly, by structuring an executive medical reimbursement program as a fully insured supplemental benefit, the coverage can avoid application of all application nondiscrimination limitations. There are products in the marketplace designed to meet this fully insured supplemental coverage structure for executive benefits.

ERISA/COBRA/HIPAA Requirements
The same ERISA, COBRA, and HIPAA requirements and restrictions addressed above with respect to executive physical program also apply in the context of an executive medical reimbursement benefit.

HSA Disqualifying Coverage
Unless it is structured to be post-deducible, an executive medical reimbursement program is disqualifying coverage that blocks HSA eligibility. That means executives covered by the arrangement cannot make or receive HSA contributions—even if their major medical plan is HDHP coverage.

• For more details: Newfront Go All the Way with HSA Guide

Executive Medical Reimbursement Compliance Summary
An executive medical reimbursement arrangement is a group health plan that must comply with group health plan laws such as ERISA, COBRA, and HIPAA. In some cases, the program is offered as a taxable plan or through a “taxable HRA,” which is an informal way to refer to a defined contribution structure designed to be taxable to avoid the §105(h) nondiscrimination rules. Executive medical reimbursement can also be provided tax-free through a fully insured supplemental policy designed to avoid application of the §105(h) and ACA nondiscrimination rules. The executive medical reimbursement can be added to the wrap documents.

Other Potential Executive Benefit: Executive Disability and Life
Disability benefits are not subject to nondiscrimination limitations, allowing employers full flexibility in offering more comprehensive and generous arrangements for executives. These arrangements are often individual policies designed to be customized for specific executive needs. Additional benefits include higher income protection levels, more types of covered compensation, and features designed to supplement the long-term disability plan with enhanced benefits.

Group term life benefits are subject to nondiscrimination limitations to enjoy the §79 exclusion from income for premiums up to $50,000 in coverage. Employers can avoid those nondiscrimination restrictions by offering individual life insurance policies to executives on a taxable basis. The mainstream disability and life insurance carriers often offer these types of arrangements.

These arrangements may be exempt from ERISA’s reporting and disclosure requirements as being for a “select group of management or highly compensated employees.” This is sometimes referred to as a “top-hat” plan, although that term technically applies only for retirement-side benefits. When qualifying for this ERISA exception, the executive disability/life insurance does not need to be included in the plan document, SPD, or 5500, but they are still subject to the ERISA claims and appeals procedures.

Other Potential Executive Benefit: Commuter
Commuter benefits are not subject to nondiscrimination limitations, allowing employers more flexibility in offering more comprehensive and generous arrangements for executives. For example, employers can provide a more generous tax-free contribution to the mass transit or parking benefit than made available to rank and file employees. Employers wishing to be more generous than the qualified limit ($340/month in 2026) can do so on a taxable basis.

Summary
Executive benefits are an increasingly common way for employers to attract and retain top talent for key positions in the organization. Although nondiscrimination rules often present barriers to implementing certain forms of executive arrangements, there are almost always workarounds, alternatives, or taxable (with a gross-up if desired) approaches that can accomplish many of the same goals.

Relevant Cites:

ERISA §733:
(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).

Treas. Reg. §1.105-11:
(g) Exception for medical diagnostic procedures.
(1) In general. For purposes of applying section 105(h) and this section, reimbursements paid under a plan for medical diagnostic procedures for an employee, but not a dependent, are not considered to be a part of a plan described in this section. The medical diagnostic procedures include routine medical examinations, blood tests, and X-rays. Such procedures do not include expenses incurred for the treatment, cure or testing of a known illness or disability, or treatment or testing for a physical injury, complaint or specific symptom of a bodily malfunction. For example, a routine dental examination with X-rays is a medical diagnostic procedure, but X-rays and treatment for a specific complaint are not. In addition, such procedures do not include any activity undertaken for exercise, fitness, nutrition, recreation, or the general improvement of health unless they are for medical care as defined in section 213(e). The diagnostic procedures must be performed at a facility which provides no services (directly or indirectly) other than medical, and ancillary, services. For purposes of the preceding sentence, physical proximity between a medical facility and nonmedical facilities will not for that reason alone cause the medical facility not to qualify. For example, an employee's annual physical examination conducted at the employee's personal physician's office is not considered a part of the medical reimbursement plan and therefore is not subject to the nondiscrimination requirements. Accordingly, the amount reimbursed may be excludable from the employee's income if the requirements of section 105(b) are satisfied.

IRS Notice 2011-1:
Because regulatory guidance is essential to the operation of the statutory provisions, the Treasury Department and the IRS, as well as the Departments of Labor and Health and Human Services (collectively, the Departments), have determined that compliance with § 2716 should not be required (and thus, any sanctions for failure to comply do not apply) until after regulations or other administrative guidance of general applicability has been issued under § 2716. In order to provide insured group health plan sponsors time to implement any changes required 4 as a result of the regulations or other guidance, the Departments anticipate that the guidance will not apply until plan years beginning a specified period after issuance.

29 CFR §2520.104-24:
Exemption for welfare plans for certain selected employees.
(a) Purpose and scope.
(1) This section, under the authority of section 104(a)(3) of the Employee Retirement Income Security Act of 1974, exempts unfunded or insured welfare plans maintained by an employer for the purpose of providing benefits for a select group of management or highly compensated employees from the reporting and disclosure provisions of Part 1 of Title I of the Act, except for the requirement to provide plan documents to the Secretary of Labor upon request under section 104(a)(1) of the Act.

29 CFR §2590.732(c):
(5) Supplemental benefits.
(i) The following benefits are excepted only if they are provided under a separate policy, certificate, or contract of insurance—
…
(C) Similar supplemental coverage provided to coverage under a group health plan. To be similar supplemental coverage, the coverage must be specifically designed to fill gaps in the primary coverage. The preceding sentence is satisfied if the coverage is designed to fill gaps in cost sharing in the primary coverage, such as coinsurance or deductibles, or the coverage is designed to provide benefits for items and services not covered by the primary coverage and that are not essential health benefits (as defined under section 1302(b) of the Patient Protection and Affordable Care Act) in the State where the coverage is issued, or the coverage is designed to both fill such gaps in cost sharing under, and cover such benefits not covered by, the primary coverage. Similar supplemental coverage does not include coverage that becomes secondary or supplemental only under a coordination-of-benefits provision.

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).