Tax Court Decision on Medical Reimbursement Plans Vacated – Whether Spouse Is “Employee” To Be Determined Via Agency Principles
It is possible to generate income tax advantages through various fringe benefits that can be provided to a spouse as an employee of the family business. One of those fringes for an employee/spouse that is a bona fide employee is employer-provided health insurance coverage that can also include other family members. The technique, if done properly, can also convert family health insurance premiums into deductible business expenses. Pursuant to I.R.C. §105, an employer can establish a medical reimbursement plan covering the employer’s spouse. While it generates a deduction for the family business for the amount of the health insurance premiums that are paid, the spouse can also use the plan to deduct insurance co-pays, non-covered prescriptions, eye glasses, dental care, orthodontics, and other medical expenses that would otherwise be an itemized "Schedule A" deduction subject to the 7.5% floor. In addition, an employee spouse would be entitled to $50,000 of group-term life insurance premiums and disability premiums as nontaxable fringe benefits. But, to get the desired tax benefits, the arrangement must be properly structured.
Recent court cases illustrate that it is critical to pay close attention to details when establishing such a plan. In a recent decision of the U.S. Court of Appeals for the Tenth Circuit, the court rejected various IRS attacks on a medical reimbursement plan even where those details were closely followed. Had the IRS prevailed on their arguments posited in the case, it would have essentially eliminated the use of medical reimbursement plans for farm proprietorships. The appellate court had some harsh words for the failure of the IRS to follow established caselaw and its own prior positions taken in medical reimbursement plan settings.
The Center for Agricultural Law and Taxation does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. The Center's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.