Increasingly, employer groups have expressed interest in establishing on-site health centers as a health care option for their employees. According to the 2019 Mercer National Survey of US Health Care Benefits, approximately 33% of organizations with 5,000 or more employees have established on-site health clinics for their workers, and an additional estimated 13% who do not currently provide such benefits indicated they were considering adding this to the list of benefits provided to employees for 2019 or 2020. Many smaller employers also recently adopted or are considering adopting on-site primary health clinics (either self-administered or in partnership with a clinic group or on-site health care vendor) for their employees.

Many employers cite the need to control costs under their major medical plan, shorter periods of absence, and increased productivity in the workforce when medical care is readily available at the worksite, as reasons for adopting an on-site health clinic model. Employers who are considering providing on-site health services to employees and/or their dependents must consider the scope of services they are providing in such onsite facilities and who is eligible to use those services.

For purposes of this discussion, On-site Health Clinics include the following types of facilities:

  • On-site Health Center – an employer-sponsored health center located on the employer’s premises
  • Near-site Health Center – an employer-sponsored health center located near the employees’ worksite
  • Shared-site Health Center – an employer-sponsored health center that serves multiple employers or employer locations, generally in a near-site setting

The range of services provided by an on-site health clinic can vary. On-site medical clinics may provide a range of basic health care services (acute or urgent care, preventive care, and diagnostic testing similar to the clinics available at chain grocery, retail, and drug stores). For example, an employee might visit an on-site medical clinic to obtain:

  • Diagnosis and treatment of certain minor illnesses and injuries
  • Physical examinations, screening tests, and vaccinations
  • Medications
  • Health care counseling, education, and similar services

More comprehensive on-site clinics may include primary care services, physical therapy, on-site pharmacies, and behavioral health services. Some are paired with other wellness services and programs. Employers with on-site clinics also frequently offer health care services to family members of their employees.

Providing health care services that exceed the first aid facility exception (see below) results in the creation of a group health plan, resulting in certain legal obligations and compliance requirements for plan sponsors.

First Aid facility Exception

The provision of health care through a facility that is located on the employer’s premises will not be considered a group health plan for purposes of ERISA and COBRA under an on-site first aid facility exception if:

  • The health care consists primarily of first aid that is provided during the employer’s working hours for treatment of a health condition, illness, or injury that occurs during those working hours;
  • Health care services are available only to current employees (not spouses, dependents, former employees, or others); and
  • Employees are not charged for the use of the facility

Application of ERISA

ERISA §733 and corresponding regulations define a “group health plan” to mean “an employee welfare benefit plan to the extent the plan provides medical care (… including items and services paid for as medical care) to employees or their dependents directly or through insurance, reimbursement or otherwise.”

Further, “The term ‘medical care’ means amounts paid for—

  • the diagnosis, cure, mitigation, treatment, or prevention of disease, or amounts paid for the purpose of affecting any structure or function of the body,
  • amounts paid for transportation primarily for and essential to medical care referred to in subparagraph (A), and
  • amounts paid for insurance covering medical care referred to in subparagraphs (A) and (B).”

If the plan sponsor is subject to ERISA (i.e., the employer is a private for-profit or not-for-profit entity that does not qualify for the ERISA exemption that applies to governmental entities and churches), the provision of medical care through an on-site medical clinic is a group health plan. As such, the plan is subject to ERISA’s general disclosure requirements. The plan must be formally adopted via a written plan document, participants must be provided with a Summary Plan Description, and the sponsor is subject to annual Form 5500 reporting requirements.

To comply with ERISA, generally employers will choose to integrate an on-site health facility with their major medical plan. From a practical perspective if services of the on-site facility are offered to employees who are not medical plan participants, separate ERISA reporting and disclosure will apply, and the employer should establish a separate plan document and SPD (or the on-site clinic benefits might instead be incorporated into a consolidated ERISA wrap plan, if the employer has adopted a wrap).

COBRA Continuation Coverage

Per Internal Revenue Code Section 9832(a), §5000, “The term ‘group health plan’ means a plan (including a self-insured plan) of, or contributed to by, an employer…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.”

Therefore, employers sponsoring on-site medical clinics that do not qualify for the first aid facility exception must offer COBRA continuation coverage to employees (and, if applicable, dependents) who lose eligibility to use the on-site medical clinic due to certain qualifying events such as a termination of employment, reduction in hours, death, divorce or legal separation, or a child reaching the limiting age under the group health plan. (Treas. Reg. 54.4980B-2)

Note that the COBRA regulations also require that qualified beneficiaries must be afforded the same open enrollment rights as other similarly-situated active employees, meaning that a former employee might elect only the on-site medical clinic at the time of a qualifying event, and then each year during his or her coverage period elect other group health coverage at open enrollment, in addition to the on-site health clinic coverage.

Generally, an on-site clinic is considered a self-insured health plan. COBRA rates should be established for no greater than a 12-month determination period, based on an actuarial or past cost calculation that is intended to reflect the fair market value of the coverage.

An on-site health clinic is generally a HIPAA-excepted benefit, meaning it is not subject to HIPAA’s general privacy, security, non-discrimination and portability rules applicable to group health plans. Agency guidance from the Labor, Treasury and Health and Human Services Departments are silent on whether near-site clinics (or shared near-sight clinics) are subject to the health plan requirements under HIPAA. Employers offering near-site clinic services should consult with their legal advisors.

However, a clinician is a health care provider, and health care providers are subject to their own HIPAA privacy and security rules. If the employer operates the clinic (as opposed to contracting with an outside health clinic), appropriate health care provider policies and safeguards will need to be adopted with respect to the clinic.

Impact on HSA Contributions

Under IRC §223, which governs Health Savings Accounts, only eligible individuals who are covered by an HSA-eligible high deductible health plan (HDHP) and who have no other disqualifying coverage (other than certain permitted coverage) may make or receive contributions to an HSA.  The IRS has made clear in guidance issued (Notice 2008-59, Q&A 10) that if an employee receives free or reduced-cost (i.e., below fair market value) significant medical benefits at an on-site medical clinic before satisfying the statutory minimum deductible, the employee will be ineligible to make or receive Health Savings Account (HSA) contributions.  Although the IRS has not specifically said so, presumably HSA eligibility would be preserved if the employees pays fair market value for any such services.

While “significant medical benefits” is not specifically defined in the Code, the example cited in the Notice provides a “safe harbor” that permits a participant to make HSA contributions if the plan does not provide services beyond the scope of performing physicals and immunizations (preventive care), administering allergy injections, and treating accidental injuries that occur at the place of employment.  However, if the on-site clinic performs more significant care, the employees are not eligible individuals for purposes of making or receiving HSA contributions.

To ensure that the employee has paid fair market value for services provided by the clinic, the on-site clinic could bill the underlying HDHP for each service provided by the clinic to each member.  The plan would then pay the clinic the allowed amount for the service after applying plan design (deductible and coinsurance).  Alternately, the clinic could bill the employee and the employee could then submit a claim to the HDHP.

Other possible approaches, such as establishing a fixed monthly access fee for the on-site clinic’s services, may involve significant risk because (a) they would not take into account the specific services received by the employee, (b) the fixed fee could be considered an insurance arrangement and therefore be ineligible to be counted against the insured’s annual deductible, nor would it be reimbursable under the employee’s HSA account, and (c) if the IRS determines the fee does not equate to fair market value, employees may have excess HSA contributions resulting in additional taxable income and excise tax penalties.

Other Applicable Laws that May Affect On-Site Clinics

  • Under the Tax Code, the provision of medical care or payment for medical care is excludable from an employee’s federal income taxes, and employers may deduct the value of coverage provided from their corporate tax returns.
  • The on-site clinic may be required to provide accommodations to disabled employees or covered dependents to ensure access to services, under the ADA. Employers sponsoring on-site clinics should also ensure they abide by ADA restrictions on exams and disability-related inquiries.
  • Certain states may require licensing of on-site clinics.
  • With respect to treatment of accidental on-the-job injury, workers’ compensation and OSHA may affect the operation and services provided by on-site clinics.
  • Specific laws regarding handling and disposal of certain materials and biohazards may apply.

Employers who are considering implementing on-site health clinics should consult with their legal and tax advisors to ensure they are in compliance with all applicable state and federal laws.

This Compliance Overview is provided for general information purposes only and should not be considered legal or tax advice or legal or tax opinion on any specific facts or circumstances. Readers are urged to consult their legal counsel and tax advisor concerning any legal or tax questions that may arise.

Any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the U. S. Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter.

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