In this time of rising health care costs and mandatory health care, there is a lot of attention in general on medical expenses.
Plain and simple, medical insurance, if you have it at all, isn’t likely to cover all of your expenses. You’re probably still going to have co-pays due and expenses that your insurance doesn’t cover such as dental, orthodontia, vision, therapeutic massage and supplements.
There are strategies to pay for those extra expenses, but you’ll want to get your plan in place soon to take advantage of deductions for 2009 medical expenses.
Here are three strategies to get you started:
( 1 ) Use an employer provided plan such as an HSA, MSA, cafeteria plan or flex spending plan. There are differences between each of these plans, but they are still fairly similar in some key points.
First, the employer has to set the plan up. If you own your own business, this could be a great benefit that you provide for your employees. It’s a way for them to pay for expenses before-tax. Otherwise, they still may get the deduction but it’ll be an itemized deduction and subject to 7.5% of adjusted gross income. Most people never get to take advantage of that deduction because of the “subject to” part.
You determine the amount you want withheld from each paycheck and it’s put into a fund. There is a limit set by the govt, though, on how much you can save up for medical expenses. And you need to decide in advance. Depending on the type of plan, you might lose any excess funds at the end of the year.
As a strategy, it’s better than nothing and if this is the only option you have, then do it!
( 2 ) MERP with a C Corporation.
Hands down, my favorite medical expense strategy. A Medical Expense Reimbursement Plan is set up by a C Corporation and gives every employee the ability to have all qualifying medical expenses reimbursed. If you have a company with a lot of employees, this generally would have too much risk. But if you have a company that employs just you and your spouse, this can be a great strategy.
You don’t need to put money away ahead of time. You don’t need to cap the total annual amount. You don’t need a 3rd party administrator. Set up the plan with a good MERP document and then just go with it!
Be careful if you have other companies with employees, you could run into a controlled group issue which would mean you have to combine all the companies together.
( 3 ) MERP with a Sole Proprietorship.
You can also set up a MERP with a Sole Proprietorship or a single member LLC that has default taxation (which means a Sole Proprietorship). There is one more step here. The owner of the Sole Proprietorship can not have the MERP. Only the SPOUSE of the MERP can. So if you’re not married, you’re out of luck. If you are married, set your spouse up with a paycheck before the end of the year to take advantage of this!
This is just one of the hundreds of strategies we use with our clients to save on taxes. How much can we save you? Find out by giving Richard a call at 888.592.4769 or send him an email to Richard@DKTaxServices.com.