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Megan C
Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 15273
Experience:  Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
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Re: Executive Medical Reimbursement Plans for 2% S Corp Shareholder

Resolved Question:

Re: Executive Medical Reimbursement Plans for 2% S Corp Shareholder Employees

I work for a company that offers an executive medical reimbursement plan for the President and Vice-President only. They are father and son respectively. The father is a >2% shareholder in the S Corp, the son doesn't own any shares.

1. Should the reimbursements be reported as income by the president?
2. Under the stock ownership attribution rules, should the son also report it as income?
Submitted: 2 years ago.
Category: Tax
Expert:  Megan C replied 2 years ago.
Thanks for asking your question! I'm sorry to hear about your tax issue and I'm going to try my best to help you understand or resolve it.

Yes, both the president and vice president (father and son) would include these medical reimbursement benefits in their gross income. This is because the plan is not a non-discriminatory plan, meaning that the entrance into the plan is limited to only highly paid employees. If all employees had access to the plan, then no one would have to include in gross income the benefits from the medical reimbursement plan.

The son includes the amount in gross income not because of the stock ownership attribution rules, but because he is benefiting from a plan that isn't available for all employees.

A very detailed resource on this topic can be found, HERE.

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Customer: replied 2 years ago.

Just to clarify... "not a non-discriminatory" -- this plan since it is only for the two people, is a discriminatory plan and that's why the son should be reporting his reimbursments in his gross income and the father should report his because he is a > than 2% shareholder of the S Corp. Is this correct?


 


In researching this on the internet, I found something that said if the reimbursement plan is covered by an insurance policy, then they wouldn't have report the reimbursement. Could this apply in this situation or does the fact that its a discriminatory plan overide that?

Expert:  Megan C replied 2 years ago.
No. Both are reporting the income because the plan is not available to all employees. It doesn't matter that they are shareholders or not shareholders. If everyone had access to the same benefit, then neither man would include the reimbursements in gross income. However, as it is a discriminatory plan, that is a plan for highly compensated individuals, they include the reimbursements in their gross income.

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Customer: replied 2 years ago.

One last question.


 


The plan is through Exec-u-Care. When I went to their website to learn more, it says that they aren't accepting new clients and to check back for details on their new, exciting future Exec-u-Care product. Which made me wonder if they had been promoting the plan as tax exempt when it wasn't.


 


I found somewhere on the internet when I was researching this, that if the plan was backed by an insurance policy and the risk was transferred to a third party then it was tax exempt.


 


But I understand you to be saying that because this plan is discriminatory, none of this really applies. That simply because it's a discriminatory plan they should be reporting the reimbursements as income. Correct?


 


And this is the last reply. Thanks for your responses.

Expert:  Megan C replied 2 years ago.
Okay - the plan you are talking about is totally different than a regular plan offered by a company. I was assuming you had a self-insured Executive medical reimbursement plan.

Under section 105(h) of the IRC Code, it is correct that if you are using a plan that fully transfers risk then the amounts are not included in gross income.

As you are in one of those plans, then the father and the son will NOT include the reimbursements in their gross income because the company isn't taking on the risk of the payments directly - it's being transferred to a third party therefore making it so that the plan is in compliance with the discrimination laws.

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Megan C, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 15273
Experience: Licensed CPA, CFE, CMA, CGMA who teaches accounting courses at Master's Level
Megan C and 3 other Tax Specialists are ready to help you
Expert:  Megan C replied 2 years ago.
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