What kind of court cases or IRS rulings support the use of a MERP or HRA and what expenses are eligible?by Tom Luker on 05/01/15
This would be a good time to post a Time Line of IRC Sec. 105:
- World War II - Wage freezes caused employers to do tax-creative fringe benefit strategies.
- 1954 – Section 105 of the IRC was enacted into law, clarifying a 1918 law and lobbied by General Electric, in order to give extra benefits to its executives.
- 1971 – Revenue Ruling 71-588 was issued. This very important ruling held that a partnership can pay benefits to the spouse of one of the partners, as a bona fide employee of the business, under an “accident and health plan” covering all employees and are (a) excluded from the spouse-employee’s gross income [Section 105(b)] and (b) deductible as an ordinary business expense [Section 162(a).]
- 1974 – ERISA was enacted. ERISA stands for the Employee Retirement Income Security Act of 1974. This law and all future amendments established the rules of employee benefits in general, but was enacted primarily due to the bankruptcy of Studebaker Auto Company when their employees (retired and active) lost all retirement “guarantees.” ERISA presents all of the hoops any size employer (from 1 to > 1,000 employees) must dance through to get satisfactory tax-qualification for tax benefits (both employer and employee),
- Some people call ERISA “Every Ridiculous Idea Since Adam” but the hoops are still “the law” for any employer and even “micro-sized” employers must dance through those hoops!
- 1978 – Section 125 was enacted, of which Sec. 105 was a part (this is the “Flexible Spending Account” – FSA.) This allows the employee to reduce W-2 wages to help pay for eligible insurance premiums or out-of-pocket medical costs. Also, Dependent Care costs up to $5,000 per year is allowed. However, one restriction in Sec. 125 is that the owners of the business are automatically classed as “highly compensated” (including the spouse and relatives of the owners.) This class, as a group, can’t have more than 25% of the benefits for the entire employee participants. This restriction is not present in Section 105, which makes it ideal for the “micro-sized” employer.
- 1980 – Non-discrimination rules were applied to Sec. 105, based on ERISA concepts. This was very important in emphasizing the strict following of rules and procedures and having a written plan.
- 1994 – T.A.M. Letter Ruling 9409006 (Technical Advice Memorandum) was issued. This letter ruling, which was applied only to the particular taxpayer, but it established the strong legitimacy of a WRITTEN PLAN providing employee benefits to an employee who happened to be a spouse of the business-owner, who was filing taxes as a sole proprietor under Schedule C of Form 1040.
- 2002, 2003 and 2004 – Health Reimbursement Arrangement (HRA) was enacted into law and Health Savings Account (HSA).
- 2004 was the first full year of liberalized definitions of “eligible medical expenses” under Section 213 and IRS Publication 502. “Over the counter” medicines were now included, added to “supplies,” such as contact lens solutions, bandages, etc. Specifically, this brought in such items as aspirin, sinus treatment, pain ointments and many items not requiring a prescription. As in the past, however, such items as vitamins are still excluded, unless required by a doctor’s prescription. Also, any modifications to your home or office, because of illness or disability, should be prescribed by your physician.
- For example, TLC’s accountant has a very bad back and must use a hot tub each night to relax his back so he can sleep well. Therefore, the construction and maintenance of the hot tub/whirlpool were deductible on his Schedule C as a “fringe benefit” for his wife, who is one of his two employees. You guessed it – his other employee is his adult daughter and they are both included in his TLC Section 105 Medical Reimbursement Plan!
- 2011 – OTC meds require a prescription, or “Certificate of Medical Necessity” (CMN) in order to be included. Supplies, such as bandages, are not restricted – even the hot tub is still okay. Contact TLC to get a CMN.
- 2014 – The first full year of the PPACA (Patient Protection and Affordable Care Act) brings MANY new rules of establishing tax-favored employee benefits which require careful administration of all of the TLC Flexible Employee Benefit plans under the IRS Code Sec.105, 125 and TLC has amended the plans. TLC also utilizes the services of major TPAs in our consultations.
- Finally, see news release IR-2010-95, which also has links to Notice 2010-59, Revenue Ruling 2010-23, and their questions and answers. For a complete list of all eligible as well as non-eligible expenses plus a list of insurance premiums that ONLY can be reimbursed in a Sec. 105 MERP/HRA, go to the IRS Publication 502. Also, a new Publication 969 covers rules for HSAs and HRAs. To receive a “Certificate of Medical Necessity” for your physician, contact us at email@example.com.
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