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Tax Benefits of Medical and Dental Reimbursement Plan

UTILIZATION OF THE TAX BENEFITS AFFORDED BY A MEDICAL AND DENTAL REIMBURSEMENT PLAN

In recent years one of the more common tax benefits utilized by closely held corporations was the Executive Medical and Dental Reimbursement Plan (Section 105(h) of the Internal Revenue Code). Section 89 of the Internal Revenue Code enacted by the Tax Reform Act of 1986 would have repealed section 105(h) and replaced it with a more complex set of rules. Congress repealed Section 89 in 1989 and reinstated Section 105(h). The plan must meet certain eligibility and benefits requirements, otherwise the plan is deemed discriminatory, and all (or a portion) of the benefits paid thereunder would be included in the gross income of the employees so benefited.

Eligibility Requirements
A plan satisfies the nondiscriminatory eligibility requirements if it meets either of two standards, which are similar to the nondiscriminatory eligibility requirements applicable to pension plans prior to revision of the 1986 Tax Reform Act. Under the first alternative eligibility standard, a plan must benefit at least 70% of all employees (or 80% percent of all employees if at least 70% percent of the employees are eligible). Under the second alternative eligibility standard, a plan must benefit a classification of employees set up by the employer and found by the Secretary of the Treasurer not to be discriminatory in favor of employees who are highly compensated individuals. In applying the alternative eligibility standards, the act provides that there may be excluded from consideration any employee who: (1) has not completed 3 years of service, (2) has not attained the age of 25, or (3) is a part time or seasonal employee.

In addition, employees in a collective bargaining unit can be excluded from consideration under the rules similar to those provided for qualified pension plans if there is evidence that accident and health benefits were the subject of good faith bargaining. Similarly, the Act provides for the exclusion of nonresident aliens, under pension plan rules.

Benefit Requirements
The act further provides that benefits must not discriminate in favor of employees who are highly compensated individuals. A plan does not meet the requirement of nondiscriminatory benefits unless all benefits provided for employees who are highly compensated individuals are also provided for all other employees. In testing plan benefits for discrimination, all facts and circumstances are to be taken into account. Consequently, if a plan, or a particular benefit provided by a plan, is terminated, the termination would cause plan benefits to be discriminatory if the limited duration of the plan or benefit has the effect of discrimination in favor of the highly compensated. This situation could arise, for example, where the duration of a particular benefit roughly coincides with the period during which a highly compensated employee utilizes that benefit. The requirements of the act are not violated merely because benefits under an employers plan are offset by benefits paid under a self-insured or insured plan of the employer or another employer, or by benefits paid under Medicare or Federal or State law.

Highly Compensated Employee
A highly compensated employee is: (1) one of the five highest paid Officers, (2) a Shareholder (owning more than 10 percent of stock, directly or indirectly), or (3) one of the highest paid 25% of all employees (other than employees who may be excluded from consideration).

Excess Reimbursement
Excess reimbursement to a highly compensated employee during a plan year under a self-insured medical reimbursement plan is included in the gross income of the employee for the taxable year in which the plan years ends. Reimbursement is an excess reimbursement if it is a discriminatory benefit, that is, if it made under a plan benefit which is provided for an employee who is highly compensated, but not to all employees who are not highly compensated.

In addition, a portion of the total amount reimbursed during a plan year to each employee who is highly compensated is an excess reimbursement if the plan does not meet the nondiscriminatory eligibility requirements. The excess reimbursement portion is determined by multiplying the total amount reimbursed to the employee during the plan year by a fraction, the numerator of which is the total amount reimbursed during that year to all employees who are highly compensated and the denominator of which is the total amount during that year to all employees. In computing the amount of an excess reimbursement because a plan does not meet the nondiscriminatory eligibility requirements, however, discriminatory benefits are not taken into account.

Regulations promulgated by the Secretary of the Treasury provide that reimbursements for certain medical diagnostic procedures do not have to be considered part of a plan, and are not subject to the nondiscrimination requirements of Section 105(h). Included with your new Corporate Kit is a copy of a plan together with a special set of minutes adopting the plan. To set the plan in operation, the papers need only be completed.

For more information, contact Elite Bookkeeping & Tax Services at (800) 416-3820 or (775) 884-6188 Address: 123 West Nye Lane, Suite 103, Carson City, NV 89706. Visit our website at www.elitebookkeeping.biz