Medical reimbursement plan ...for sole proprietor ...for partners...for shareholder/employee

[Guest Moe Howard2]

It just sounds too good to be true. Tell me what's wrong with these. Can the medical bills really be deducted and not be taxable.

1) A sole proprietor owns a hardware store. He establishes a medical reimbursement plan (MRP). His wife and kids are the only employees of the store. They (owner, wife, & kids) incur $thousands of dollars of medical bills, which they pay, and then the store reimburses them. The store deducts those medical bills on the owner's Form 1040 Sch C. The reimbursements are not taxable to them.

2)Same as 1)above, except the store is incorporated. He owns 100% of stock. All of them are employees. The corp deducts the bills. Nothing is taxable to them.

3)Same as 1)above, except the store is a partnership. He & wife are partners and the kids are employees. The partnership deducts the bills. Nothing is taxable to them.

4)Same as 1)above, except he has no employees. Can he have a MRP just for himself.

It seems to me that there is no discrimination, because 100% of all employees are allowed to participate.

[Ron Snyder]

IRC Section 105(h) applies to medical expense reimbursement plans. Read it.

1) Sole proprietors (and other self-employed) are permitted tax deductions on their personal returns (form 1040 and Schedule A) rather than on their business returns. Schedule C is for deducting expenses relative to employees only.

2) Subject to complying with the non-discrimination requirements of IRC Section 105(h), this is okay.

3) Same problem as 1) above. Whether children are able to be treated as employees depends on their ages.

4) No, because he is self-employed.

[GBurns]

For sole proprietors and self-employed individuals you should follow the guidance set out by the IRS in various Pubs and in this Coordinated Issue Paper:

http://www.irs.gov/pub/irs-isp/all-cafh.pdf

Note that the MERP is for the employees while the sole proprietor or self-employed individual is a covered dependent. Also note the warning that the "employee spouse" must be a bona fide employee. The ages of the children must be considered in determining whether they are eligible dependents or whether they can or are to be treated as employees.

In the case of Item 2 there is a difference between an S and a C corp. You did not state which form was being used. C corps would be okay but S corps might in some cases be able to use the above method.