How Health Care Reform Adversely Impacts Executive Health Care and COBRA Subsidy Arrangements

Background

Employer-provided COBRA,1 other medical subsidies, and perquisites affecting medical care are common components of many executive employment and severance agreements. However, as discussed more fully below, many of these arrangements will not comply with the nondiscrimination requirements under the Patient Protectionand Affordable Care Act (“Health Care Reform”).

Prior to Health Care Reform, only self-insured medical plans were subject to nondiscrimination rules. These rules prohibit medical plans from discriminating, with respect to both eligibility and benefits, in favor of highly compensated individuals (HCIs).2 If a self-insured medical plan is found to have discriminated in favor of HCIs, a portion of medical benefits (e.g., plan reimbursements for surgery) received by the HCIs under the plan become taxable to the HCIs. The employer paying the benefits, however, is not penalized. Since the value of plan reimbursements is usually far greater than the cost of the premiums, self-insured medical plans routinely avoided the application of these rules by treating the premium cost as taxable income to the executive.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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