| Save Money with a Medical Expense Reimbursement Plan |
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| Written by Larisa Humphrey |
| Sunday, 11 April 2010 17:54 |
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Small business owners can save money by using a Medical Expense Reimbursement Plan (MERP) to write medical expenses they can't deduct on their personal tax returns.
Small business owners can save money by using a Medical Expense Reimbursement Plan (MERP) to write medical expenses they can't deduct on their personal tax returns. Most higher income taxpayers are unable to deduct medical expenses because they don't spend more than 7.5% of their adjusted gross income on medical expenses. Here's an example: A taxpayer's adjusted gross income is $100,000. He would have to spend $7500 in medical expenses in order to qualify for the deduction. If he spent $7501, he would get a deductoin of $1. A MERP can save the day. Here's how it works: Your business reimburses you and your employees for uninsured medical costs. The business gets a write-off for the amount it reimburses the employees and the employees do not have to claim the reimbursement as income! All of your out-of-pocket expenses that are normally deductible as medical expenses qualify for the medical reimbursement program, including health insurance, prescriptions, co-pays, exams, glasses, hearing aids, hospital costs, doctors fees, dental work, lab tests, therapy, special schools & transportation for disabled children, health care supplies, fertility treatments, and much more. Your choice of business entity has an effect on your ability to use a MERP. Only C corporations are eligible, since sole proprietors, partnerships, LLC owners, and S-corporations are considered self-employed. If you are not currently operating as a C corporation, you will need to establish one in order to use the MERP. If you have a decent amount of medical expenses, it will be well worth it to establish a new corporation. If your business is not a C corporation, you can establish one in order to pay yourself or your spouse benefits as an employees. Of course this c corporation must have a business purpose, so you should determine what part of your current income can now be allocated to your new corporation. By paying yourself and spouse benefits through the c-corporation, you will even more money on taxes since you will not have to pay the payroll taxes associated with the benefits. The Internal Revenue Code Section 105 covers the MERP. It says your plan must meet two tests in order to be deductible. It must be considered non-discriminatory and be able to provide tax free fringe benefits to employees. 2. BENEFITS TEST: The requirement is that all benefits to highly compensated employees and their dependents must also be provided for all other employees and their dependents. In other words, the plan can't discriminate in favor of highly compensated employees. 2. ELIGIBILITY TEST: The plan cannot discriminate in eligiblity to participate. It must pass at least one these three requirements: (a) At least 70% of all nonexcludable employees actually participate in the health plan (b) At least 70% of all nonexludable employees are eligible to participate in the plan and at least 80% of all the employees who are eligible to participate actually do; and (c) the plan must be offered to a fair cross section of employees that is found by the IRS not to discriminate in favor of highly compensated employees. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Find out more about MERPs and start saving big money on taxes. Make it a priority to learn about other tax saving strategies in order to make sure you are saving as much money on taxes as possible! |