Monster Media 1996 #14/Monster Media No. 14 (April 1996) (Monster Media, Inc.).ISO/business/sba961.zip/F241.SBE

Text File | 1996-01-01 | 7KB | 156 lines

@101 CHAP ZZ

        ┌──────────────────────────────────────────────┐
        │            MEDICAL BENEFIT PLANS             │
        └──────────────────────────────────────────────┘

Medical insurance and medical reimbursement plans) are among
the most common (and expensive) fringe benefits being of-
fered by employers in these times of skyrocketing medical
costs.  Since individual taxpayers who itemize deductions
can now only deduct their personal medical expenses and med-
ical insurance costs to the extent such costs exceed 7.5%
of adjusted gross income, this fringe benefit is more impor-
tant than ever for tax purposes, since a non-discriminatory
employer-provided health care plan is deductible to the em-
ployer but not taxable to the employee.

If you are in business for yourself, the only way to deduct
the costs of medical coverage for yourself (including reim-
bursement of medical expenses) in full is to incorporate as
a C corporation--S corporations may deduct the cost of such
insurance on 2% shareholders, but the 2% shareholders must
include that amount in income, and can only deduct 30% (25%
before 1995) of the cost of such coverage, plus any amount
they may be able to get as an itemized deduction.

Unincorporated business owners do not get to deduct the
cost of their own medical coverage, in general.  However,
for tax periods up to December 31, 1994, self-employed in-
dividuals (sole proprietors or partners in a partnership)
may deduct 25% of their medical insurance costs in computing
adjusted gross income if they maintain a non-discriminatory
health care plan for themselves and their employees.  In
1995 and subsequent years, 30% can be deducted.

@IF119xx](Congress, in 1995, retroactively extended the 25% deduc-
@IF119xx]tion, for the calendar year of 1994.  If you have filed
@IF119xx]your 1994 tax return and could have claimed such a self-
@IF119xx]employed medical expense deduction for the 1994 tax year,
@IF119xx]you should file an amended 1994 income tax return, taking
@IF119xx]such medical insurance deductions, and claiming a tax
@IF119xx]refund with respect to the medical insurance premiums
@IF119xx]paid for you by @NAME.)
@IF119xx]
@IF119xx](@NAME is a @ENTITY.)
@IF119xx]
One way to get around the problem of (mostly) non-deductible
medical insurance in an unincorporated business is where you
have hired your spouse as an employee of the business.  In
that case, you may cover your spouse under a company medi-
cal insurance plan, deduct such expense, and still be co-
vered yourself, as a family member under your spouse's
coverage.  While this may seem a bit contrived, the IRS
has blessed it in Revenue Ruling 71-588, 1971-2 CB 91.

@CODE: IA
Note that Iowa has recently passed a tax law that will al-
low all individual taxpayers (not merely self-employed ones)
to take a 100% deduction for health coverage premiums paid
for themselves or their spouses or children, beginning with
the 1996 tax year.  This deduction will be allowed in lieu
of the partial deduction that is currently tied to the exis-
tence of the 30% (25% before 1995) federal deduction for
health coverage that is allowed to certain self-employed
taxpayers.

@CODE:OF
A medical reimbursement plan can be a particularly attrac-
tive tax-saving device for a small corporation (C corpora-
tion), if you have only a few or no employees.  For exam-
ple, you can use the medical reimbursement plan to cover
medical expenses not covered by medical insurance, such as
annual deductibles or co-payments and other items such as
orthodontics, dental care and eyeglasses.  With a properly
drawn reimbursement plan, all of these expenses can be
deducted from the corporation's income when paid to you,
and not be taxable income to you.

              ┌───────────────────────────────────┐
              │   URGENT WARNING TO EMPLOYERS!    │
              └───────────────────────────────────┘

Note that group health care plans must allow an employee
(or other beneficiaries, such as spouse or children) to
elect continued coverage (typically for up to 18 months)
under the plan after the employee terminates employment,
dies, or otherwise would lose coverage.  Failure of an em-
ployer to provide this feature will cause payments under
the plan to become non-deductible and benefits or coverage
provided to the highly-compensated employees to become tax-
able.  In addition, the Technical and Miscellaneous Revenue
Act of 1988 added SEVERE PENALTIES, in the form of an ex-
cise tax of $100 per day per beneficiary, if the employer's
failure to provide for such extended coverage causes an
employee or other beneficiary of the plan to lose coverage
for a period of time.  Most insurance companies should by
now have re-written their policies to prevent such an oc-
currence, thus the real risk is if you have a self-insured
(i.e., uninsured) medical reimbursement plan for employees
that fails to provide elective continuation coverage as
the law requires.

@CODE: HI

        ┌───────────────────────────────────────────────┐
        │      HAWAII PREPAID HEALTH CARE (PHC) LAW     │
        └───────────────────────────────────────────────┘

Hawaii is one of the few states to REQUIRE that employers
provide prepaid health care benefits for their employees.
Employees must be provided medical and hospital care in
one of three ways:

    .  Medical insurance (or coverage under a health care
       plan such as Kaiser);

    .  A self-insured plan of the employer that has been
       approved by the state; or

    .  Under a collective bargaining plan that provides
       at least the minimum level of required benefits.

Note that for purposes of the Hawaii PHC law, an employer
does not have to cover the following persons:

    .  Workers employed for less than 20 hours a week;

    .  Agricultural seasonal workers;

    .  Insurance and real estate salespersons who are
       paid solely in the form of commissions;

    .  Individuals working for a son, daughter or spouse;

    .  Children under age 21 working for their father or
       mother.

The employer may pay the full cost of Prepaid Health Care
coverage but may instead choose to share part of the cost
with employees.  The amount that can be withheld from an
employee's wages is limited to one-half the premium cost,
but not to exceed 1.5% of the employee's wages.

@CODE:OF
@CODE: CA

Note that California has not conformed to federal legisla-
tioned that increased the self-employed health insurance
deduction from 25% to 30%.  Thus, on your California indi-
vidual tax return, you can still only deduct 25% of such
health insurance premiums, unless or until the state gets
around to conforming to the federal provisions.

@CODE:OF