Tax Guru – Ker$tetter Letter

Q:

Subject: corporate medical plan

You recommend setting up a corporate medical plan for people with C-Corps who have a lot of medical expense. Can you comment on whether this a formal arrangement involving a plan document, or a corporate resolution or an IRS filing or a non-formal arrangement that simply involves paying medical expenses from the corporate check book?

Thanks for your consideration and your website which is a real public service.

A:

There are companies that will provide admin services for small employer plans, but that is an unnecessary expense.

I have handled some recent IRS audits where they allowed all of the medical costs without even asking for formal documentation of a plan. However, I think it is still a good idea to have a corp resolution just in case your auditor isn’t as lenient.

Attached are a couple of samples from the Small Business Tools program from CFS Software that can give you a good idea of what a plan resolution should look like.

TaxToolsMERP1.doc

TaxToolsMERP2.doc

I hope this helps.

Kerry Kerstetter

Additional Info: TaxCoach has an even more detailed plan document, along with an excellent implementation guide with the applicable IRS regs and court cases to document the kinds of expenses that can be included in the plan.  Their planning module on MERPs has a lot of useful info, including these advantages of using a MERP:

• You can deduct 100% of your employees’ health insurance. Deductible health insurance costs include major medical and supplemental premiums, Medicare premiums, qualified long-term care premiums, and Medicare supplemental (“Medigap”) policies.
• Out-of-pocket medical costs include routine expenses such as co-pays, deductibles, and prescriptions; occasional expenses such as eyeglasses and dentistry; big-ticket items like orthodontics, fertility treatments, and schools for learning-disabled children. It also includes over-the-counter medicines and health-care supplies, if prescribed by a physician. You can reimburse employees or pay health-care providers directly.
• The plan lets you deduct 100% of your out-of-pocket costs, bypassing the usual 7.5% floor for itemized deductions. You’ll also avoid any self-employment tax you would otherwise pay on amounts you deduct as plan benefits.