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Medical reimbursement plan for employee-spouse.

Employees can exclude reimbursement Reimbursement

Payment made to someone for out-of-pocket expenses has incurred.
 they receive from their employers for medical expenses--and employers can deduct payments made to employees--only under certain conditions. There must be a bona fide [Latin, In good faith.] Honest; genuine; actual; authentic; acting without the intention of defrauding.

A bona fide purchaser is one who purchases property for a valuable consideration that is inducement for entering into a contract and without suspicion of being
 employer-employee relationship and a proper plan, even if unwritten LAW, UNWRITTEN, or lex non scripta. All the laws which do not come under the definition of written law; it is composed, principally, of the law of nature, the law of nations, the common law, and customs. , that conforms to IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws.  guidelines for medical reimbursement plans. And covered employees must know about or have notice of the plan. The IRS looks even more closely when the employer and employee are husband and wife.

Maureen Speltz was a licensed day care provider who operated a sole proprietorship A form of business in which one person owns all the assets of the business, in contrast to a partnership or a corporation.

A person who does business for himself is engaged in the operation of a sole proprietorship.
 in Minnesota. Her husband, who also had a full-time job, was her only part-time employee. Mrs. Speltz established a medical reimbursement plan for her employee-husband with the help of a tax adviser. An employment contract specified his duties and minimum work requirements to qualify for the plan. Mrs. Speltz deposited his salary, which was used to reimburse re·im·burse  
tr.v. re·im·bursed, re·im·burs·ing, re·im·burs·es
1. To repay (money spent); refund.

2. To pay back or compensate (another party) for money spent or losses incurred.
 him for health insurance premiums and any uninsured medical costs, into a flexible spending account flexible spending account,
n an employee reimbursement account primarily funded with employee-designated salary reductions. Funds are reimbursed to the employee for health care (medical and/or dental), dependent care, and/or legal expenses and are

In the years 2000 and 2001 Mrs. Speltz deducted the reimbursements on her schedule C as a business expense and the couple excluded the payments on their joint tax returns. The IRS disallowed the deductions and assessed a deficiency The taxpayers petitioned the Tax Court for relief.

Result. For the taxpayer. The IRS argued that the couple could not exclude the reimbursements to the husband because no proper plan existed. And, even if it did, the husband was not a bona fide employee and the plan was not sufficiently available to him. The service further contended Mrs. Speltz could not deduct the amounts on her schedule C since they were not business expenses. The Tax Court rejected all of these arguments.

First, the court found that a proper plan existed. Mrs. Speltz had prepared a document that explained employees were eligible to receive up to $6,500 a year in medical expense reimbursements and specified the number of hours they must work to receive them. The Tax Court concluded the employee-husband knew of the plan because he had signed a document stating his annual compensation consisted entirely of medical reimbursements up to the $6,500 limit. In addition, during the years in question, he had submitted claims for reimbursement under the plan.

The court also said Mr. Speltz was a bona fide employee because Mrs. Speltz could control his work activities--the "fundamental" test used to determine whether an employer-employee relationship exists. In addition the court held that Mr. Speltz performed activities essential to operating the day care business. Thus his salary was compensation for work he had actually performed and it did not result from his spousal spou·sal  
1. Of or relating to marriage; nuptial.

2. Of or relating to a spouse.

Marriage; nuptials. Often used in the plural.

The Tax Court also found that payments for personal services personal services n. in contract law, the talents of a person which are unusual, special or unique and cannot be performed exactly the same by another. These can include the talents of an artist, an actor, a writer, or professional services.  are ordinary and necessary business expenses; the taxpayers in this case had to demonstrate only that the payments were reasonable. To ascertain this the court used a log maintained by Mrs. Speltz and divided her husband's total compensation by his total work hours. It then held the payments were reasonable because his hourly rate was much less than the salary she would have had to pay to another employee.

This case demonstrates how a sole proprietorship can both obtain tax benefits and provide health benefits for family members. It also illustrates the importance of carefully researching the issue and implementing a well-documented plan.

* Peter F. and Maureen L. Speltz v Commissioner, TC Summary Opinion 2006-23.

Prepared by Charles J. Reichert, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , professor of accounting, University of Wisconsin, Superior.
COPYRIGHT 2006 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2006, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.
downdraft (Member): Proprietor 3/21/2011 10:13 AM
On January 01,2009 I initiated a "Start-up" for a business out of our home office;
I drafted a business plan that forcasted desired progress through 2011;
The plan states:
1.The need for me to help compensate the "Start-up" activity with outside employment for myself through 2011;
2.The need for my spouse be employed partime in 2010 to assist with building our accounting and bookkeeping 2 hours a week, being compensated soley by a Medical Expense Reimbursement Plan during the "Start-up" period;
3. She would be the only employee forecasted; however, the MERP included other employees hired, both permanent full time (40hours ) and permanent part-time ( 2 hours per week).
4. The MERF is in written for, signed by my spouse as having understood the MERF, and the agreement to accept as sole compensation was also signed by her. the agreement.
5. The services she provides are required by schedule to be accomplished at the end of each work week (Friday),and every week of the year thereafter;
6. A record of her hours, along with a statement of the work accomplished is being kept.
7. Payments for qualified medical expenses were made from "Start-up" money furnished by me as the proprietor, and have been logged;
8. Product development ("how-to DVDs)of our first DVD is forecasted for completion during the last half of 2011, and to be ready for marketing (and our first sale) during the Christmas season of that year.
Any comments as to the problems if any regarding these reimbursements/payments for the MERF being deductable both for the company and the employee (spuse)

 Reader Opinion




Article Details
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Author:Reichart, Charles J.
Publication:Journal of Accountancy
Date:Oct 1, 2006
Previous Article:Understanding closing agreements.
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