Many employers have expressed concerns about ensuring their organizations’ ongoing success in recruiting and retaining executives and managers and managing executive risk. To address these concerns, employers either have implemented or are considering implementing a variety of executive fringe benefits. One such executive perk that has been gaining popularity in recent years is an executive physical program. According to the International Foundation of Employee Benefit Plans (IEFBP)¹, 35% of employers surveyed indicated they currently provide an executive physical benefit to select executives and key employees.

With an executive physical program, a select network of “preferred providers” offers the program, typically for a negotiated price based on the spectrum of services the employer selects. When setting up the program, the employer contracts with a large hospital, health clinic or concierge medical service in the geographic region where executives live or work.

The executive physical program generally provides coverage for age and gender-appropriate preventive care services that go beyond screenings that are ordinarily covered by the employer’s group health plan, which can lead to early detection and treatment of health conditions (thereby also potentially helping to stabilize the employer’s costs under the major medical plan). Employers may be able to select from various packages, with costs varying widely based on the scope of services covered.

Typically, the program is financed by the general assets of the plan sponsor (employer). In some cases, if the employer’s major medical plan covers some of the services, the provider will bill the health plan for those portions. In contrast, the employer pays the provider directly for any services beyond what’s covered by the health plan.

An executive physical program is considered a “group health plan².” As such, it is subject to various applicable federal laws, including ERISA, COBRA, the Public Health Services Act (including specific ACA mandates) and the Health Portability and Accountability Act (HIPAA) portability, nondiscrimination, privacy and security regulations.

ERISA: The executive physical program typically falls within the definition of an “employee welfare plan.” It is a “plan, fund or benefit arrangement” established by the employer to benefit employees or former employees.³ Unless the plan sponsor is a governmental entity, church, association or convention of churches, ERISA applies to the program.

A top-hat exemption from ERISA reporting (Form 5500) and certain participant disclosure rules (such as the requirement to provide SPDs and various notices) may apply if the program is designed to provide benefits solely to select management and highly compensated employees. However, a plan document is generally required regardless of whether that exemption applies to the program. The plan sponsor must provide the DOL with a copy of the plan document upon request. Therefore, the plan sponsor should consider adopting a plan document establishing the executive physical program that includes information such as eligibility guidelines, covered benefits, and claims and appeal procedures.

TAX TREATMENT: The plan document also serves as the “plan” for tax treatment purposes. In general, the employer/plan sponsor may deduct the cost of group health plan benefits as business expenses on their income tax returns. In addition, benefits provided to employees for medical care⁴ are generally excluded from taxation under Internal Revenue Code (IRC) §1055. IRC §105⁵ sets a framework for the provision of non-taxable benefits for employees, former employees and their covered spouses and dependents. Section 105(h) generally requires self-insured health plan sponsors to not discriminate in favor of highly compensated employees in terms of eligibility, contributions and benefits to preserve the plan’s tax advantages for highly compensated individuals. However, when the program provides only reimbursement for diagnostic procedures (e.g., preventive care), the Section 105(h) nondiscrimination rules do not apply.⁶

¹ International Foundation of Employee Benefit Plans (IEFBP) Employee BenefitsSurvey – 2022.

² A Group Health Plan is defined as follows: “The term “group health plan” means a plan (including a self-insured plan) of, or contributed to by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families.” (Internal Revenue Code Sec. 5000(b)(1))).

³ ERISA §3(1) defines “employee welfare benefit plan” and “welfare plan” to mean “any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section 302(c) of the Labor Management Relations Act, 1947 [29 USC §186(c)] (other than pensions on retirement or death, and insurance to provide such pensions).”

⁴ Medical Care: The IRS definition of medical care” includes “amounts paid for— (A) the diagnosis, cure, mitigation, treatment, or prevention of disease, or amounts paid for the purpose of affecting any structure or function of the body, (B) amounts paid for transportation primarily for and essential to medical care referred to in subparagraph (A), and (C) amounts paid for insurance covering medical care referred to in subparagraphs (A) and (B).”

⁵ However, the benefit is not excludable from taxable income when it is provided to more-than-2% shareholders of a partnership or Subchapter-S corporation. Such individuals are not treated as employees under the Code. See IRS Publication 15-B: Employer’s Tax Guide to Fringe Benefits.

⁶ Treas. Reg. §105-11(g)

Regulatory and Legislative Strategy Group