Medical expenses are rising and it’s getting harder to find a way to write them off from your tax return. You can deduct them as an itemized deduction. But good luck with that. You have to first have enough in expenses to get over the threshold of 7.5% of your adjusted gross income. And thanks to the new Affordable Care Act, you don’t get much benefit with a Medical Flexible Savings Account. The total limit per employee is just $2,500 per year.
There is still a tax strategy you can use, though. That’s with a Medical Expense Reimbursement Plan. (MERP) First, you need a business. Second, you need the right business structure. A C Corporation or an LLC taxed as a C Corporation can set up a MERP that allows the owner to participate in. If you have a partnership or an S Corporation, you can set up a MERP, but you can’t participate if you’re an owner. In other words, if you own a C Corp, it works for you. If you own a partnership or S Corp, it doesn’t work for you.
There is one more time when a MERP will work. If you own a single member LLC or have no structure at all, you can employ your spouse and have your spouse have a MERP. If you’re not married or don’t have a Schedule C business, it won’t work.
The MERP allows you take a direct deduction on your or your corporation’s tax return for all out-of-pocket medical expenses.
That’s the background. Now here’s a question about MERPs that we received from one of our USTaxAid members:
“Does the LLC-C with a MERP also need to offer medical insurance?”
Short answer = no. You may have requirements to provide medical insurance or face a penalty due to some federal laws, but having a MERP doesn’t mean you have to have medical insurance.
However, if you do have medical insurance through your C Corp, it will be 100% deductible.
Remember that you can’t discriminate with either medical insurance or a MERP if you have full time employees in your business.