Medical Reimbursement Plans

Spring, 2008

As many are aware, current tax law allows self-employed individuals (proprietorships, limited liability companies, partnerships, and sub-s corporations) to deduct 100% of their health insurance premiums from adjusted gross income (AGI).  This deduction, however, does not allow for any uninsured medical expenses unless they qualify as an itemized deduction.  To qualify, these expenses must exceed 7.5% of AGI and only that excess is deductible.  Neither deduction reduces self-employment taxes, but the StarPlan, a medical reimbursement plan does.

How does this work? The StarPlan qualifies uninsured medical expenses as business deductions, thus reducing income, self-employment taxes, and income taxes.  In order to get these deductions, a qualified medical reimbursement plan, the StarPlan, must be adopted.  The plans documents, established by the employer, identifies what employees are eligible and what medical expenses qualify.  The employer may also elect to place a limit as to how much the company will pay for medical expenses.

Throughout the year, eligible employees will report their unreimbursed medical expenses to the employer on the StarPlan reimbursement form.  The employer reviews the unreimbursed expenses for eligibility, reimburses the eligible expenses, and then deducts the reimbursements as business expense deductions on the tax return.

What employers qualify?  Simply put, all of them.  However, the type of business entity directly impacts how beneficial the medical reimbursement plan is to the business owner.  Since a medical reimbursement plan is an employee benefit plan, there must be an employer-employee relationship.  Consequently, this type of plan will work with a sole proprietor or one member LLC where the spouse is the employee, as the owner or member is not and cannot be an employee.  This type of plan also works with a multi-member LLC, a partnership, or a sub-chapter S corporation.  However, the owners and their spouses cannot be included.  Only non-spousal employees can participate.

This type of plan works best with a corporation where the stockholder is the only employee.  The corporation could install a medical reimbursement plan to cover the employee and the immediate family.  In this situation, the corporation/employer would want to include all allowable medical expenses and not put a dollar limitation on the plan since it covers only family members.  As you can see, the StarPlan could be a great tax benefit for a closely held or a family held business.  It would allow medical expenses, which may not be deductible at all, to be deducted as business expenses.  It would not only save income taxes, but self-employment taxes as well.

If you think this plan might be a benefit for you and your business, give us a call and we will tell you how this plan can work for you.