Many employers would like to provide enhanced healthcare benefits to executives, managers, or other key employees.
For example, an employer might ask:
- Can I contribute more to an executive’s HRA?
- Can I offer an HRA only to management?
- Can executives receive larger reimbursements than other employees?
- Can I create a special medical reimbursement plan for executives?
In many cases, the answer is no—at least not through a standard Health Reimbursement Arrangement (HRA).
Federal nondiscrimination rules generally prohibit employers from designing self-insured health benefits that favor highly compensated employees if they want those benefits to receive favorable tax treatment.
Understanding these rules is an important part of designing a compliant employee benefits program.
Why Can’t Employers Simply Offer Better HRA Benefits to Executives?
Unlike salary or bonuses, employer-sponsored health benefits are subject to specific tax rules.
Many HRAs are considered self-insured medical reimbursement plans, which are subject to federal nondiscrimination requirements.
These rules are intended to ensure that tax-advantaged healthcare benefits are not provided primarily for the benefit of owners, executives, or other highly compensated employees.
If an HRA discriminates in favor of highly compensated individuals, the tax consequences generally fall on those highly compensated participants.
What Are the Nondiscrimination Rules?
Several federal laws include nondiscrimination requirements for employee benefit plans.
Depending on the type of benefit being offered, employers may need to satisfy rules relating to:
- Employee eligibility
- Employer contributions
- Benefit design
- Availability of benefits
The exact rules depend on the type of benefit plan.
Because these requirements can be complex, employers should consult experienced benefits professionals when designing specialized reimbursement programs.
Can an Employer Offer an HRA Only to Executives?
Generally, no.
An employer typically cannot establish a traditional HRA that covers only executives or other highly compensated employees if doing so causes the plan to fail applicable nondiscrimination requirements.
Similarly, employers generally should not:
- Provide larger HRA contributions only to executives.
- Limit participation to senior management.
- Exclude rank-and-file employees without considering the applicable rules.
- Design reimbursement arrangements that disproportionately favor highly compensated individuals.
Who Is Considered a Highly Compensated Employee?
The definition varies depending on the law that applies.
In general, highly compensated employees may include:
- Corporate officers
- Higher-paid employees
- Significant owners
- Certain key executives
The specific definitions depend on the type of employee benefit plan and the applicable federal requirements.
Are There Any Exceptions?
Possibly.
Some benefit programs allow employers to establish different benefit levels for legitimate employee classifications.
For example, certain Health Reimbursement Arrangements, such as an Individual Coverage HRA (ICHRA), permit different contribution amounts for permitted employee classes if the applicable regulations are satisfied.
However, simply choosing “executives” as the class is generally not sufficient.
The rules governing employee classifications are detailed and should be reviewed carefully before implementing different contribution strategies.
What If I Want to Reward My Executives?
Many employers wish to provide additional compensation to executives without creating compliance concerns.
Rather than modifying an HRA, employers often consider alternatives such as:
- Increased salary
- Performance bonuses
- Deferred compensation arrangements
- Additional paid time off
- Other executive compensation programs
These options are generally governed by different rules than employer-sponsored healthcare reimbursement plans.
Can Employers Offer Different Benefits to Different Groups of Employees?
Sometimes.
Benefit plans may distinguish between employees based on classifications that are permitted under applicable regulations.
Whether those classifications are allowed depends on the type of benefit being offered and the rules governing that particular plan.
Because the requirements vary, employers should seek guidance before implementing different benefit structures.
What Happens If an HRA Fails the Nondiscrimination Rules?
If an HRA fails applicable nondiscrimination requirements, favorable tax treatment may be affected for highly compensated participants.
The consequences depend on the specific type of plan and the applicable federal rules.
For this reason, employers should review proposed benefit designs before implementing executive-only reimbursement arrangements.
How Empower Helps Employers Design Compliant HRA Plans
Many employers want to offer competitive benefits while remaining compliant with IRS requirements.
Empower helps employers:
- Design compliant HRA programs
- Understand contribution options
- Review employee eligibility
- Administer reimbursement arrangements
- Navigate complex benefit rules
Our goal is to help employers build benefit programs that support employees while complying with applicable regulations.
Have Questions About Executive HRA Benefits?
If you’re considering offering different healthcare benefits to executives, managers, or key employees, it’s important to understand how the nondiscrimination rules may apply.
Contact Empower to discuss your goals. We can help you evaluate your options and determine whether your proposed benefit design complies with applicable requirements.
