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| Are Medical Expenses Making You Ill? The IRS Has the Cure! |
09-20-2006 |
Business owners who operate under an entity structure that includes a C corporation have reason to celebrate. The IRS just announced a new policy that makes one of the best tax shelters in the Internal Revenue Code—a corporate medical reimbursement plan—even sweeter.
Here’s what happened: In Revenue Ruling 2003-102, released September 5, 2003, the IRS announced that various employer sponsored medical plans, including a corporate medical reimbursement plan, can reimburse employees for “over-the-counter” medicines, drugs and dietary supplements that are purchased without prescriptions. Such reimbursements are not included in the employee’s gross income!
This is a change from prior practice, and it could be a big deal depending on your individual situation. Up to this point, medical reimbursement plans routinely provided that employees could be reimbursed for purchases of medicines and drugs only if they were purchased on a prescription issued by a physician.
Now the requirement that such medical expenses be reimbursable only if purchased by prescription is tossed out. That means that your purchases of antacids, an allergy medicine, a pain reliever, and a cold medicine from a pharmacy—all without a prescription—are now eligible for reimbursement under a medical reimbursement plan.
INDIVIDUAL DEDUCTIONS vs. CORPORATE MEDICAL REIMBURSEMENT PLANS
Let’s go back and look at some of the background rules. Generally, if a taxpayer has expenses for medical care, those expenses can be deducted from adjusted gross income, but only with two severe restrictions: (a) the taxpayer has to itemize deductions, and (b) the deduction is allowed only for expenses that exceed 7.5% of adjusted gross income. Those restrictions pretty much wipe out the deduction for most taxpayers. Very few people can get above the 7.5% floor.
But Congress inserted a great tax break into the Code by providing that a corporate employer can pass a medical reimbursement plan.
What is a Corporate Medical Reimbursement Plan? And why is it one of the most powerful tax breaks for corporate owners and employees?
-It pays for 100% of your medical insurance premiums.
-Allows you to deduct 100% of your health plan deductibles, out-of-pocket expenses and co-pays.
-You can even deduct the costs of pre-existing conditions!
-Deduct the costs of braces and other dental work.
-Deduct the costs of driving to and from the doctor.
-Deduct the costs of hearing aids and glasses.
-Deduct the costs of nontraditional forms of medicine such as chiropractic, acupuncture, and massage therapy.
-It covers you, your spouse and your children!
For many people these expenses can add up to thousands of dollars every year. If you have a business, and have not set-up a legal entity, this is one more reason to look at incorporating your business.
DOES YOUR CORPORATION’S MEDICAL REIMBURSEMENT PLAN NEED TO BE AMENDED TO TAKE ADVANTAGE OF THIS NEW DEVELOPMENT?
There is a final point, and it is important. Notwithstanding the good news of Rev. Rul. 2003-102, no medical expenses are reimbursable unless the medical reimbursement plan so provides. Most, if not all, medical reimbursement plans were originally drafted to provide reimbursement for items that were deductible—i.e., only medicine and drugs purchased with prescriptions. Indeed, most well-drafted medical reimbursement plans contained language that was taken verbatim from the regulations, such as the following:
"Reimbursement shall not be made for cosmetic surgery, or drugs, optical equipment or other appliances, unless purchased upon prescription of a physician, dentist or other treating person."
This type of language is fatal to the reimbursement opportunity provided by Rev. Rul. 2003-102. If the language of the medical reimbursement plan restricts the reimbursement of medicines and drugs to those purchased with prescriptions, then the medical reimbursement plan needs to be amended immediately. Unless the language of the medical reimbursement plan allows the reimbursement of over-the-counter drugs and medicines, Rev. Rul. 2003-102 does no good.
Hence it is incumbent upon every corporate officer and director of a corporation with a medical reimbursement plan to have the medical reimbursement plan reviewed and amended to expand the scope of expenses that are reimbursable to the fullest extent allowed by the new Revenue Ruling. If you don’t, you might get a headache. And if you do, the aspirin you take won’t be reimbursable. That would be a real migraine!
-Joe W.
P.S. For those of you who would like assistance updating or establishing a Medical Reimbursement Plan, I have put together the Medical Reimbursement Plan DocFile. It has everything you need to implement a new plan, or make the correct changes to your current one. It includes:
-Waiver of Notice of Special Meeting of the Board of Directors
-Minutes of Special Meeting of the Board of Directors
-Amended Medical, Dental and Vision Reimbursement Plan
-Employee Letter
-Complete Step-By-Step Instructions
All you will need to do is fill in the blanks, and start saving money. The cost for the all of the documents is only $147. To order your DocFile now, .
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