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Medical Expense Reimbursement Plan
A medical expense reimbursement
plan is an employee fringe benefit which can provide you and your
employees with a significant tax break. Under a plan, the eligible
employee is reimbursed by the company for out-of-pocket medical
expenses. The plan provides a tax-free benefit, so that medical
expenses can be paid with "before tax" dollars. The plan
can be, but is not necessarily done under the umbrella of a Cafeteria
Plan, which is another fringe benefit that employers can offer to their
employees.
The difference
between the plan described here and one under a Cafeteria Plan is that in
this plan, the employer pays the cost of the reimbursements, while
under a Cafeteria Plan, the employee pays the
cost through salary reductions.
Under the rules of
Internal Revenue Code Section 105, your plan must meet two important
tests before it is considered non-discriminatory and able to provide a
tax-free fringe benefit to its covered employees..
1. The first test is
a benefits
test. This
test requires all benefits provided to Highly Compensated Employees (HCEs) and their dependents must also be provided for
all other employees and their dependents. In addition, all benefits
available for dependents of HCEs must also be
available on the same basis for the dependents of all other employees who
are participants. Also, the maximum limit that is set for benefits under
the plan must be uniform for all the participants and their dependents,
and may not be modified by reason of an employee's age or length of
service. In short, a plan may not discriminate in favor of HCEs in terms of benefits offered, nor in the why the
plan is operated.
2. The next test is
an eligibility
test. Simply
put, the plan can not discriminate as to eligibility to participate. The
plan must pass at least one of these three requirements:
1] at least 70% of all nonexcludable employees actually participate in the
health plan;
2] At least 70% of all nonexcludable employees are eligible to participate
in the plan, and at least 80% of all employees who are eligible to
participate in the plan actually do so;
3] the plan
must be offered to a "fair cross-section" of employees that is
found by the IRS not to discriminate in favor of HCEs.
If the plan fails the
eligibility test then at least a portion of the benefit that is provided
to HCEs will be treated as taxable income.
FILING
REQUIREMENT:
Self-insured health plans are "required" to file annual returns
with the IRS and, in some cases, with the Department of Labor (companies
with 100+ employees). However, the IRS suspended the filing requirement
until it issued further instructions. This was in 1990 and nothing
further has been heard.
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