Services for small businesses are changing for 2017
Plans for 2017: I am offering set-up of Health Reimbursement Arrangements (HRA) for employer paid and Flexible Spending Account (FSA) for employee paid health plan setup for qualifying businesses and offering claim administration at approximately $100 per employee per year. Setup takes 24-48 hours after I have all the required information.
The IRS allows businesses to take a tax deduction for validated employees’ medical expenses that are paid directly by the employer. Generally these payments can reimburse the employee for any reasonable health care expense that is not already covered by a health insurance plan. The deduction is authorized under Section 162 of the Internal Revenue Code.
As an additional tax benefit, Internal Revenue Code Section 105 and possibly 132 specifies that the employer payments might not be considered taxable income to the employees under certain circumstances described as allowable exclusions from income. Those circumstances are likely to change in 2017 with the anticipated repeal of portions of the Affordable Care Act. I am now working with other industry professional professionals to adapt to the new legal framework.
One requirement in any circumstance is that the employer must verify the validity of the claims. Unfortunately, this is where the topic becomes difficult for the employer. Without verification, the business deduction is not allowed. With improper validation, the employer is vulnerable to legal action by the employee for violation of privacy rights.
While federal tax law requires employers to review the details of employees’ health plan claims, another federal law known as “HIPAA” prohibits employers from requesting or using into employee medical information. Even accidental knowledge of an employee’s medical details can create significant potential liability in the event of any subsequent employment conflict. The employer needs an accounting report showing that the uninsured health plan deductions are valid business expenses under the law, but the employer may not prepare this report. Treasury officials addressed this legal conflict by adaptation of a legal concept known as “third party claim validation”.
Third party claim validation means that an accountant who is unaffiliated with the employer’s management team audits the health plan claims and then issues an independent written statement that can be relied on by the company’s management and the IRS. The audit procedures used for third-party claim validation vary widely between accountants but the basic steps include: 1) substantiation of transactions, 2) verification of deductibility of expenses as listed in IRS Publication 502, 3) verification that claims are not covered by another benefit plan, 4) pairing claims with available benefits under the employer health plan, 5) preparation of a written report summarizing the findings without disclosing employees’ personal medical details.
Additional examination procedures are necessary when employees have access to funds through a bank debit card or other similar means.
The review does not need to be completed by a Certified Public Accountant. In fact, most of these services are performed by employee benefits consultants known as “TPAs”. Claims are usually verified online with minimal effort on the part of employees. My employee benefit practice Freedom Benefits performs this service on request under the same fee structure as other services. Small businesses can set up a health plan meeting IRS requirements and have claims validated for as little as $150.
Keep in mind that this procedure applies only to uninsured health plans like medical expense reimbursement plans (MERP), health reimbursement arrangements (HRA) and flexible spending accounts (FSA). This does not apply to health plan expenses paid through insurance, since the insurance company already reviews these claims.
It is also worth noting that third-party claim validation is not required for one person businesses. Since the taxpayer and the employer are the same, there are no HIPAA risks. The taxpayer’s presentation of claims on the tax return serves as a written statement of the validity of the claim. Of course, adequate written records should be maintained of the medical expenses in the same manner as any other business expense.