United States Company Tax Site: Medical Expenses

Introduction The US Tax Code excludes nine types of fringe benefit expense from taxable income.

Business Travel Expenses that are "lavish or extravagant", says the IRS, are not tax deductible.

Qualified Tuition Reduction A qualified tuition reduction is tax-free.

Housing Most types of job-related housing cost are deductible.

Pensions Tax-privileged retirement plans: ERISA, ESOPS, IRAs etc.

Company Cars Personal use of a company car is usually a taxable non-cash fringe benefit.

Medical Expenses Benefits received from health-care plans are generally taxable; the current regime will no doubt be substantially changed by President Obama's health-care law, when finally passed.

NOTE: The tax regime applying to all fringe benefits is highly complex, and professional advice should be taken before planning any scheme designed to minimise taxation. These notes are intended simply to give a general overview and should not be relied upon as a basis for action in any particular case.

Medical Expenses

Health care is a very hotly debated and important topic to many Americans. Employers are not required to provide health care to employees, but many recognize its importance and do provide an accident or health plan for their employees. This is an arrangement that provides benefits not only for their employees but also for their spouses and their dependents in the event of personal injury, or sickness. The plan may be insured or non-insured and does not need to be in writing.

There is no federal law in the US requiring employers to provide health insurance. Many workers go uninsured, though numerous employers voluntarily provide insurance as a means of attracting and keeping good employees. Hawaii is the only state that requires employers to provide health insurance. Some states require that employers who do provide insurance provide some type of minimum coverage.

Some employers require employees to pay the full cost of insurance plans; other employers will pay some of the premiums for employees. Usually the employer deducts money for the premiums from employees' pay.

There are two main types of insurance plans. Under a reimbursement plan, the employer reimburses a hospital or doctor for medical services. This type of plan allows employees to choose their own medical providers. Reimbursement plans are becoming less common as health maintenance organizations (HMOs) grow in popularity. Under an HMO plan, employers pay a monthly fee and employees can only go to a hospital or doctor approved by the HMO.

Generally, the value of accident or health plan coverage provided by an employer is not included in an employee's income. Benefits received from the plan are generally taxable. Contributions by an employer to provide coverage for long-term care services are generally not included in income. However, contributions made through a flexible spending or similar arrangement (such as a cafeteria plan) must be included in the employee's income. Contributions by an employer to an employee's medical savings account are not included in the employee's income.

An employee must report as income any amount he or she receives for personal injury or sickness through an accident or health plan that is paid for by his or her employer. If both the employee and the employer pay for the plan, only the amount that the employee receives that is due to his or her employer's payments is reported as income. However, certain payments may not be taxable to the employee. If an employee pays the entire cost of an accident or health plan, he or she does not have to include any amounts received from the plan for personal injury or sickness as income on his or her tax return.

Generally, if an employee is covered by an accident or health insurance plan through a cafeteria plan, and the amount of the insurance premiums has not been included in his or her income, he or she is not considered to have paid the premiums and must include any benefits received in his or her income. If the amount of the premiums was included in his or her income, then he or she is considered to have paid the premiums and any benefits received are not taxable.

President Obama's Health-Care Plans

The health-care program is having a very rough ride in Congress, but in mid-October, 2009, the Senate Finance Committee approved Sen. Max Baucus’s health reform bill, the America’s Healthy Future Act, which contains a number of new proposals affecting taxes.

The bill, approved by the tax-writing committee by a vote of 14 to 9, now heads to the Senate floor. However, the House of Representatives is currently considering its own health care reform bill, and the two sets of legislative proposals will eventually have to be reconciled before a final healthcare package lands on President Obama's desk for his signature.

According to Baucus, the Congressional Budget Office has said that the bill has an estimated cost of USD829bn dollars but is fully paid for and will reduce the federal deficit by USD81bn within the first ten years.

“The bill we passed today puts patients and doctors – not insurance companies – in the driver’s seat,” said Baucus. “It includes strong provisions to end insurance company practices that discriminate against those who are sick or have pre-existing conditions. It modernizes our health care system to reduce waste and inefficiency and slows health care costs that stretch families, businesses and our economy to a breaking point. This balanced, common-sense bill begins to shave the federal deficits. The American people deserve a health care system that works for them and this vote is a critical step toward that goal.”