Since 1980 companies of all shapes and sizes have taken advantage of insured executive medical reimbursement plans. With the passage of the Patient Protection and Affordable Care Act last year, prospects for the continued marketing of these plans looked bleak at best, but isn’t it strange sometimes how quickly things change?
On Dec. 22, 2010, the Internal Revenue Service issued Notice 2011-01 delaying the effective date of the new health care reform’s requirements that insured health plans meet the same nondiscrimination rules that apply to self-funded plans under Section 105(h). With the issuance of that notice, the doors have been opened again to begin marketing insured executive medical reimbursement plans.
Even before this notice was issued, certain plans may have been excepted if they were provided under a separate policy, certificate or contract of insurance. Regulations specify that for coverage supplemental to a group health plan to qualify as excepted benefits, the coverage must be specifically designed to fill gaps in primary coverage, such as coinsurance or deductibles. Also, some plans have already removed any annual limit the plan might have and added coverage for dependents up to the age of 26.
As you may recall, insured executive medical reimbursement programs have been a popular benefit for high income individuals for many years for those employers who wished to provide extra health insurance benefits to its executives.
Prior to 1980, most of these plans were self-insured, but the Revenue Act of 1978 established non-discrimination requirements for self-insured medical reimbursement under Section 105(h) of the Internal Revenue Code. As a result of this legislation, most executive only medical plans were discontinued or moved to an insured basis as the non-discrimination rules did not apply to insured plans. The theory at the time was that lawmakers felt that the underwriting requirements on these plans would limit any potential abuses.
Insurers over the years have recognized this need and responded with insured medical reimbursement plans that allow companies to provide these tax advantaged plans to their key executives. As with any other insured plan, employers can deduct this offering as a reasonable and ordinary cost of doing business. Benefits received by the recipients are typically received tax free. Examples of expenses that can be submitted under an insured medical reimbursement plan would include deductibles and coinsurance, dental care and orthodontia, annual physicals and preventive care, vision care (including eyeglasses and contact lenses), and treatments for nervous/mental disorders as well as drug and alcohol abuse. Generally, if an expense is medically necessary and qualifies under Section 213 of the Internal Revenue Code, it is eligible for reimbursement.
To avoid a plan being viewed as self-insured, it is important to make certain that there is a policy of insurance in place and that there is a shifting of risk from the employer to an unrelated third party, the insurer. Remember, payments made to executives under a self-insured arrangement are taxable, while claim payments made to covered individuals under an insured medical reimbursement program are generally tax free.
Recruiting and retaining key individuals to any organization is a key element in keeping a company successful. Installing an insured medical reimbursement plan will go a long way in finding and keeping those individuals content and productive. In fact, with the taxpayer only able to deduct unreimbursed medical expenses in excess of 7.5% of gross income, it is impractical for the high income earner or business owner to realize any tax relief in this fashion.
For most brokers, insured medical reimbursement plans are a great door opener to the executive suite. Business owners already confronted by greater regulation and fewer tax breaks for key executives are looking for ways to keep these key groups of employees engaged. Providing a resolution to this problem will go a long way in providing additional opportunities for the broker.