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Text File | 1996-11-06 | 8KB | 188 lines

@101 CHAP ZZ

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

Medical insurance and medical reimbursement plans) are among
the most common (and expensive) fringe benefits being offered
by employers in these times of skyrocketing medical costs.
Since individual taxpayers who itemize deductions can now
only deduct their personal medical expenses and medical
insurance costs to the extent such costs exceed 7.5% of
adjusted gross income, this fringe benefit is more important
than ever for tax purposes, since a non-discriminatory
employer-provided health care plan is deductible to the
employer 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
reimbursement 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%
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,
self-employed individuals (sole proprietors, partners in a
partnership, or members in an LLC that is taxed like as a
partnership) may deduct 30% of their medical insurance costs
in computing adjusted gross income if they maintain a
non-discriminatory health care plan for themselves and
their employees.  The percentage of such costs that are
allowable as a deduction will increase to 40% in 1997, and
will gradually increase to 80% over a period of years, as
follows:

        1998  -  45%
        2003  -  50%
        2004  -  60%
        2005  -  70%
        2006  -  80%

@IF119xx](Congress, in 1995, retroactively extended the deduction
@IF119xx](25%) for the calendar year of 1994.  If, when you filed
@IF119xx]your 1994 tax return, you could have claimed such a
@IF119xx]self-employed medical expense deduction for the 1994 tax
@IF119xx]year, you should file an amended 1994 income tax return,
@IF119xx]taking such medical insurance deductions, and claiming a
@IF119xx]tax 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 medical
insurance plan, deduct such expense, and still be covered
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.

Note that the new Small Business Job Protection Act of 1996,
provides for "portability" of medical insurance coverage for
employees who change jobs, and also enacts, on a limited
basis, "medical savings accounts" (MSAs), into which an
individual may contribute tax-deductible amounts each year,
to be used for non-covered medical costs, such as for paying
the deductibles under medical insurance policies.  Only a
limited number, 750,000, MSAs will be permitted for those
who sign up for them, on a first-come, first-served basis,
during a a four-year test period, after which time MSAs will
either be expanded, or the program canceled, but with any
existing MSAs allowed to continue.

MSAs are only to be allowed for self-employed persons or
employees of small firms with 50 or fewer employees.  In the
case of employees, contributions to MSAs by the employer
will not be taxable income to the employee, provided the
MSA is not offered as part of a "cafeteria plan."  Unlike
"flexible spending accounts" (FSAs) available under prior
law, there is no "use it or lose it" rule, so that any
unspent amounts remaining in the MSA are retained, and
will eventually go the employee, like an IRA.

@CODE: IA
Note that Iowa has recently passed a tax law that will allow
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
existence of the 30% federal deduction for health coverage
that is allowed to certain self-employed taxpayers.

@CODE:OF
A medical reimbursement plan can be a particularly attractive
tax-saving device for a small corporation (C corporation),
if you have only a few or no employees.  For example, 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
employer 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
taxable.  In addition, the Technical and Miscellaneous
Revenue Act of 1988 added SEVERE PENALTIES, in the form of
an excise 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 occurrence, 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 legislation
that increased the self-employed health insurance deduction
from 25% to 30%.  Thus, on your California individual 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