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| Medical Reimbursement Plans: Big Savings for Small C Corporations |
09-25-2006 |
One of the things that corporate employees love most about the mother ship is the medical coverage. In fact, sometimes the only thing that’s even remotely lovable about working for a large corporation is the peace of mind that comes from knowing that your family’s medical expenses will be covered.
But just because you work for yourself doesn’t mean you can’t tap into the same healthcare savings that the large corporations enjoy. If you trade under a C Corporation business entity, you can have your independence and still enjoy major corporate healthcare savings by establishing a medical reimbursement plan, or MRP. If you trade as a sole proprietor, partnership or S Corporation, you cannot establish an MRP.
With a medical reimbursement plan, your one-person C Corporation can deduct 100% of your medical insurance premiums, out-of-pocket costs, deductibles and even uninsured health and accident expenses as a business expense. The same holds true for spouses and family, provided the spouse qualifies as an employee.
One major advantage of an MRP is that you pay for it with pre-tax dollars. With many plans, at least some healthcare expenses (such as co-pays and non-covered procedures) are paid for with after-tax dollars; you earn money, pay taxes on that money, then pay for health care after that.
With an MRP, you as a corporation can purchase a group medical insurance plan and establish a reimbursement plan that pays for everything else (deductibles, co-payments and even uninsured “health-related expenses”). Because this is accomplished with pre-tax dollars, the reimbursements are not taxable income for you or your fellow employees (a good thing), but are fully deductible by the corporation (another good thing!).
A note to calorie watchers: The Internal Revenue Service recently ruled (Rev. Rul. 2002-19) that the cost of a weight-loss program prescribed to treat obesity is a deductible medical expense. Although the status of some expenses associated with fighting the battle of the bulge, such as health club memberships or spa visits, remains unclear, costs directly associated with weight loss programs may now be paid with pre-tax dollars.
Naturally, there are conditions to be met to use an MRP effectively. For example, in order to cover your spouse, you must be married and your spouse must qualify as an employee in the view of the Internal Revenue Service. If you have employees other than your spouse, you must also offer the medical reimbursement plan to them as well, but you may limit their participation based on certain criteria, such as length of service or fulltime employment.
For example, say you have seasonal help: If you limit the MRP to fulltime, year-round employees only, you would not have to offer the plan to your part-timers.
An MRP offers unlimited flexibility; you control the eligibility requirements, qualifying expenses and reimbursement maximums, if any. But all terms and conditions of your corporate MRP must be written to be valid.
The tax professionals at Traders Accounting can help you choose the business entity that is right for your health insurance needs and advise you on tax-savvy ways to make your health care expenditures work for you. If you’ve already established a C Corporation, contact us today or click here- we have the forms and expertise necessary to help you set up a medical reimbursement plan.
Change Makes Employment Tax Filing Easier
Good news for traders with employees: the IRS will soon allow some small businesses to file their employment tax information annually rather than quarterly.
Employers who estimate their annual employment tax liability at $1,000 or less will soon be eligible to file the new Form 944 (Employer’s Annual Federal Tax Return). New businesses can apply for annual filing when they apply for their employer identification number (EIN) and the IRS will tell them if they qualify.
The IRS will begin notifying businesses that qualify by Feb. 1. If you think you do but have not heard from the IRS by Feb. 15, please contact the IRS at 1-800-829-0115.
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