We are already into the current tax year. Can we start our Medical Expense Reimbursement Plan or Health Reimbursement Arrangement for this year, dating back to the first of January?by Tom Luker on 05/01/15
If employment of the spouse has already been formalized, it’s much easier to provide the benefits retroactively but caution must be exercised. Much depends when you submit the first quarterly report to IRS.
- First of all, insurance premiums are a known entity and thus the premium reimbursement might be OK going back a few months or even many months.
- However, the out-of-pocket costs are another matter. There have been IRS court cases settled in favor of the IRS which often has the effect of throwing out the plan for the entire year. One is a famous case involving American Family Mutual Insurance Company [WI] that started a Section 125 “Cafeteria/Flex Plan” late in the year and allowed EEs to put extra dollars into their Flexible Spending Account [FSA] to “catch up” with the expenses they’ve already incurred.
- The IRS correctly determined that the FSA was like an insurance policy where the employer was acting as an insurance company [which curiously, the ER was actually an insurance company!]
- In a typical insurance policy, you don’t just buy the insurance in October and have claims covered that occurred in January! Or, if your house was already burning, could you rush out and buy a policy?
- Therefore, caution must be exercised. If it’s December when you start a plan, just use the OOP costs for that month to qualify [or maybe in the 4th quarter of the year, if you’re originally employing your spouse so that the Form 941 can be filed covering at least the immediate past quarter.] This can be the procedure for any initial hiring of the spouse [or ANY employee] for other times of the year.
- Insurance premiums, however, might be safely reimbursed retroactively to the beginning of the year.
- If you’ve been self-administering a “do it yourself” MERP/HRA in the past, without any problem, and have now decided to use a Third Party Administrator [TPA], because of proper paper-work backup, it should be very safe to start the TPA-administered plan later in the tax year.
- The TPA should be apprised of when and how you’ve been doing the MERP and even if you’ve used another TPA, the new TPA should be aware of the change.
- As always, we network with your tax professional when helping to set up a proper Sec. 105 Medical Expense Reimbursement Plan.
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