The Medical Reimbursement Plan with Regards to Deduction Limitations

This is part of the third section of Anker Reed HSC’s blog series entitled “To Incorporate or Not to Incorporate? That is the Question” regarding the medical reimbursement plan and deduction limitations of the corporation and individual.

The corporation may establish a medical reimbursement plan as a benefit to its employees, which eliminates the medical expense deduction limitation. In a medical reimbursement plan the corporation will reimburse the entertainer/employee/shareholder for expenses incurred in securing medical treatment. When the corporation reimburses the employee for the medical expenses incurred, the employee avoids the limitation on the deductibility of medical expenses.

Furthermore, the employee avoids taxation on the reimbursed amount under Internal Revenue Code § 105 which provides that “gross income does not include amounts paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by him for the medical care … of the taxpayer, his spouse, and his dependents.” The effect on the corporation is equally beneficial to the corporate taxpayer in that “payments pursuant to a medical reimbursement plan by the employer corporation are deductible as a business expense.” (Berwind, 1985)

Using the previous example, all $25,000 in medical expenses would be specifically excluded from the gross income of the employee and would be deductible to the corporation; this saves approximately $12,500 in tax to the employee as an individual taxpayer.

Therefore, there is a definite tax benefit to the incorporated employee in the form of increased deductibility of expenses-deductions which may be limited to the individual taxpayer.

* For specific inquiries regarding a business legal matter that you may have, you are welcome to visit our Los Angeles Business Lawyer services page.

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  1. My office has had debates on whether there are any major differences between Medical Reimbursement Accounts vs Health Reimbursement Accounts. Is there any differences regarding the ability to allow shareholders who own more than 2% of an S corp take the deduction under a medical reimbursement accounts? I know they cannot do this when they offer an HRA. I also know they can do this for an HSA, but I am hoping you can help me out here as there is little relief we can offer our owners (including myself) when it comes to easing the burden of the ever spiriling health insurance costs. Can the MRA (the ability to reimburse me for medical expenses like deductibles and coinsurance cost share)be useful to the owner shareholders of S corps or PC’s besides benefiting the employees only? Thanks so much Maxine Casalbore

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