Using Medical Reimbursement Plans

Businesses can set up special plans, called medical reimbursement plans, to pay for medical expenses not otherwise covered by insurance. For example, medical reimbursement plans can pay for the cost of eye care or cover co-payments and other out-of-pocket costs. Medical reimbursement plans are self-insured plans; they are not funded by insurance.

Medical reimbursement plans can cover only employees. These include owners of C corporations (but not S corporations). The plans cannot discriminate in favor of highly compensated employees, such as owners and officers.

The IRS has endorsed a way around the ban on deducting medical costs of self-employed owners. If the business has a medical reimbursement plan for employees and your spouse is an employee (nonowner), the medical reimbursement plan can cover the medical expenses of your spouse-employee and your employee’s spouse (you) and dependents. In this way, your medical costs are deductible by the business and are not taxable to you.

Disadvantages

While self-insured medical reimbursement plans provide advantages to employers, there is a significant risk of substantial economic exposure (that claims will run higher than anticipated and planned for). This problem can be addressed by setting a dollar limit (such as $2,500) on medical reimbursements for the year.

Another disadvantage to this type of plan is the administration involved (reviewing and processing reimbursement claims). For a very small employer, however, this may not be significant.