© 2023 MJH Life Sciences™ and dvm360 | Veterinary News, Veterinarian Insights, Medicine, Pet Care. All rights reserved.
Unreimbursed medical expense plans provide little known alternative
Qualified plans simple to administer; offer benefits to employees, owners
Over the last several years, few practices have escaped the profit margin impact felt by the rising costs of employee health insurance coverage.
Practice owners and hospital administrators are increasingly challengedto find creative ways of retaining employees through competitive compensationand benefit plans. A little known, but merited, benefit plan for small businesshas long resided in the tax code.
Sometimes, the Internal Revenue Service uses plain old common sense.Unreimbursed medical expense plans are one of those instances where thelogic of the tax system is inescapable.
Such qualified plans, on a non-discriminatory basis, provide medicalexpense benefits to employees that are excludable from the employee's grossincome and fully deductible by the employer as a business expense. The plansare simple to administer. No special tax form reporting is required.
Under Section 105 of the Code, employers may establish a written planthat provides for employees, on a non-discriminatory basis, reimbursementof medical expenses not covered by another plan or program. Reimbursementmay be for qualified medical expenses of the employee, the employee's spouseand dependents.
The reimbursement paid by a practice employer is excludable from theemployee's W-2 and deductible by the employer.
As with all tax regulations and rules, specific exceptions and requirementsmust be followed.
The plan must not be discriminatory. The plan must be written. The planmust provide consistent reimbursement. The employer defines what medicalexpenses may be reimbursed in the plan. The identified reimbursed expensescan be limited by the employer, but must not be picked discriminatorilyto favor the advantages of highly compensated individuals or shareholders.
An unreimbursed medical expense plan meeting the IRS requirements isbasically a self-insured medical expense program. As such, it is treatedas "accident and health insurance" under Section 105(e) of theInternal Revenue Code.
Medical expense reimbursements paid under such a plan are excludablefrom the employee's gross income under Section 105(b). Reimbursements paidto an employee are not subject to income taxation or Social Security andMedicare tax withholdings.
Similar to special rules for treatment of heath insurance plans in sole-proprietorships,partnerships and SubChapter S corporations, principals in these entitiesmay be required to include reimbursements in gross income. However, spousesand dependents providing bona fide services to the practice as employeesmay be considered on the same basis as any other employee within plan guidelines.In such a situation, the qualifying medical expenses of an owner might bereimbursed through the spouse's or dependent's allowance without inclusionin income.
A recent ruling, Rev. Ruling 2002-58, 2002-38 I.R.B. (9/23/2003) madea common sense clarification that reimbursement of medical expenses thatwere incurred prior to the establishment of a plan are not excludable fromthe gross income of the employee if paid by the employer. Simply stated,you cannot reimburse expenses that were incurred prior to the time you establishedyour unreimbursed medical expense plan without taxation to the employee.Reimbursement of expenses prior to the formal establishment of the planis not permitted to be retroactive.
The typical plan document includes administrative guidelines, as wellas definitions. Expenses that are qualified for reimbursement must generallyfit within the definition of a deductible medical expense. Typical expensesthat might be reimbursed include dental care, eye examinations, contactlenses and eyeglasses, medical insurance premiums, and the deductible portionof medical and hospital visits paid by the employee.
It is the employer's right to exclude reimbursement for certain procedures,if desired. These must be defined within the document.
Generally, the employer will establish limits of the total monetary amountthat will reimbursed during the year. Amounts may accrue on a month-by-monthbasis and be reimbursed to the employee as hours of service are fulfilled.The administration may stipulate that unused, earned amounts for reimbursementbe carried over to the next year or not. New employees may be eligible onlyafter a certain number of months of service (and up to three years), asdefined within the plan document. If part-time or seasonal employees areexcluded, the definition of a full-time employee for inclusion in the planmay be stipulated by state statute, and clarified within the document throughthe assistance of an attorney well-versed in state employment law and guidelinesfor definition of full-time employment.
As an example, a practice's plan document might provide that full-timeemployees are eligible after three months of continual service. At thatpoint, the maximum amount of earned benefit per month that may be reimbursedis $100.
Employees are responsible for timely submission of receipts to the practiceadministrator for authorization and payment. The practice writes a checkto the employee to reimburse exactly for the amount of the receipt thussubmitted.
If the employee has only been eligible for two months of inclusion inthe plan, a maximum of $200 of reimbursement is available. A receipt forqualified medical expense care submitted in excess of that amount wouldbe carried forward to subsequent months, when the employee has earned aright for reimbursement through additional hours of full-time service tothe practice.
Under this plan example, an employee who had worked for a full year aftermeeting the initial eligibility requirement of three months in prior yearswould be eligible for up to $1,200 of reimbursement by the practice. Ifonly $900 of receipts had been submitted during the course of the year,the employee can only be reimbursed for up to that amount, not anythingmore.
Any allowance not used might be lost at the end of the year, if the documentso provides. If carryover is allowed, then the unused $300 of potentialreimbursement would carry forward to the next year, and newly qualifiedmedical invoices submitted to the practice by the employee could be reimbursed.
Revenue Ruling 2002-58 is an excellent reminder of a relatively uncomplicatedalternative to group health insurance or cafeteria plans. A reasonable optionis to establish a sensible unreimbursed medical expense plan for your practicethat will benefit employees by offering healthcare monetary support thatis not includable in income or subject to Social Security taxes and an expenditurethat is deductible by the employer.
A word of caution is appropriate. These plans must be written. They mustbe authored by a competent attorney licensed in the state of the practice'sdomicile. The plan must be signed on a contemporaneously current basis andmust be ratified through the corporate minutes.
Do not do your own plumbing. Engage a competent attorney.
In fact, we strongly recommend that an attorney be consulted on a periodicbasis to ensure not only that these requirements are met, but the corporateminute book is maintained consistently to document plan adaptation and allother issues of business administration and employee management
Mr. McCafferty owns Owen E. McCafferty (OEM), CPA, Inc., in NorthOlmsted, Ohio. The firm offers tax, accounting and management consultingservices.
Dr. Heinke is a partner of Owen E. McCafferty (OEM), CPA, Inc., inNorth Olmsted, Ohio. The firm offers tax and accounting and management consultingservices. E-mail can be directed to her at MLHeinke@aol.com; phone: (440)779-1099.