Can I Save Money By Deducting My Medical Expenses?

For about the last 25 years, the IRS has allowed small businesses to adopt Medical Expense Reimbursement Plans for their employees as authorized under Internal Revenue Code Section 105. These Plans allow for your business to pay for things like insurance premiums, dental care, eye care, prescription drugs, etc., on behalf of your employees. The costs are deductible to your business but are not taxable income to the employee.

This is the same concept that big businesses use in Section 125 plans (cafeteria plans) and Medical Savings Accounts (MSA's). The small business owner who currently has no employees but does have a spouse that helps in the business achieves the biggest benefit. The owner hires their spouse as a bona fide employee and adopts a Medical Reimbursement Plan that covers all of the employee's family medical costs...your costs.

Calculate Your Potential Savings With
The Medical Reimbursement Plan Calculator

Example Of Potential Savings

If Joe Taxpayer, a small-business owner, normally has out-of-pocket medical costs of about $400 per month, his tax savings could be $2,000 or higher. If he spent $400 per month or $4,800 per year and was in the 28% tax bracket, Joe could save 28% in federal taxes -- or $1,344 -- and 15.3% in self-employment taxes -- or $734 -- for a total savings of $2,078.

Remember that Joe will save not only on federal taxes, but also on his self-employment taxes and on state taxes (if Joe lives in a state that has state tax). The state tax rate could generate savings of another 3% to 5%. Also, don't forget that the $4,800 per year in medical expenses is money that is going to be spent anyway...with or without a Medical Reimbursement Plan. Therefore, the $2,000 savings is totally a result of the plan.

Reporting Requirements

A key benefit of the Medical Reimbursement Plan is that neither the IRS nor the Department of Labor has an annual filing requirement. Larger companies file an annual form 5500 for their benefit plans, which can be complicated. Medical Reimbursement Plans have no such filing requirement. However, the IRS does require that the plan be in writing and be nondiscriminatory.

How Do I Start A Medical Reimbursement Plan?

The sponsors a Medical Reimbursement Plan through NASE HRA. Click here for more info.