UNIT 22

Question 1

MEDICAL EXPENSE COVERAGE FOR SOLE PROPRIETORS AND PARTNERSHIPS

Answer 1

Self employed persons are allowed to deduct 100% of what they pay for health insurance (including qualified long-term care insurance) from their gross income. To claim this deduction, however, the self employed:

• must show a net profit for the year
• cannot claim the deduction for any month in which they were eligible to participate in a health plan subsidized by another employer, if they are also self-employed, or by the employer of their spouse.

Premiums paid by a partnership on an accident an health insurance policy are generally deductible by the partnership. The amount of the premium is included in the partner’s gross income, and is deductible on the same basis as for the self-employed persons.

Benefits are considered a reimbursement of expenses and are NOT taxable.

Question 2

BUSINESS DISABILITY INSURANCE

Answer 2

There are 3 types of business disability insurance plans

• buy-sell
• key person
• business overhead expense (BOE)

Buy-sell- Premiums are not deductible, benefits are tax free
Key Person- Premiums are not deductible, benefits are tax free
Business overhead expense- Premiums are tax deductible, benefits are taxable

Question 3

HEALTH SAVINGS ACCOUNTS

HSA

Answer 3

A Health Savings Account is a tax-advantaged medical savings account available to tax payers enrolled in a high deductible health plan.

• contributions to an HSA are tax deductible
• earnings in the HSA grow tax deferred
• HSA distributions are tax free when used to pay qualified medical expenses.
• Funds roll over and accumulate year to year if not spent.
• Distributions for other than qualified medical expenses are subject to income tax; a 20% penalty also applies unless the account beneficiary has died, becomes disabled, or is age 65 or older.

Question 4

HSA ELIGIBILITY

Answer 4

Individuals are eligible to establish HSA if they:

• have no other comprehensive medical expense coverage, including Medicare
• cannot be claimed as a dependent on another person’s tax return
• are enrolled in a High-Deductible Health Plan (HDHP)

Question 5

HIGH DEDUCTIBLE HEALTH PLANS (HDHPs)

Answer 5

A high deductible health plan is a health plan that offers lower premiums and requires the insured to pay a high deductible when the plan is used. The amount of the deductible required changes yearly.

Question 6

HEALTH REIMBURSEMENT ACCOUNTS (HRAs)

Answer 6

Some employers provide employees with health plans with relatively high deductibles and create a tax favored Health Reimbursement Account (HRA) for each covered employee. Unlike the HSA, a high deductible health plan (HDHP) is not required in order for the employer to establish an HRA. Similar to the HSA, the employee can obtain reimbursement from the HRA for medical expenses that are subject to deductibles, coinsurance, and co-payments. HRA contributions are pretax and made only by the employer. The employer may restrict use of the funds in an HRA, and the funds roll over year to year.

Question 7

FLEXIBLE SPENDING ARRANGEMENTS (FSA)

Answer 7

A Flexible Spending Arrangement (FSA) is a Cafeteria Plan benefit that is funded with employee money of a salary reduction. Employee contributions are made on a pre-tax basis, and as a qualified employee benefit plan, employee benefits are non-taxable. Working spouses are also covered by the employee’s benefit plan and choices can be made to avoid duplicating benefits provided by their spouses plan.

• withdrawals by employee are not taxed
• spend it or lose it

From the employer’s perspective:

• the plan is funded with employee contributions, so the employer’s expenses are limited to administrative costs
• the salary reduction method results in a reduced payroll and therefore reduced payroll taxes for the employer