Tax Tips
| Publication year | 1977 |
| Pages | 1562 |
| Citation | Vol. 6 No. 9 Pg. 1562 |
1977, September, Pg. 1562. Tax Tips
Section 105(e) of the Internal Revenue Code provides that an amount received by an employee under an accident or a health plan for employees is to be treated as an amount received from accident and health insurance and is therefore not taken into income by the employee. Payments made by the employer pursuant to such a plan are deductible under Code Section 162 as ordinary and necessary business expenses provided the amounts expended by the employer are reasonable.(fn1)
The tax advantages of a medical expense plan have been unaffected by the Employee Retirement Security Act of 1974 (ERISA) even though some administrative complications have arisen as a result of ERISA. The plans still provide an effective way of compensating an employee with favorable tax consequences to the employee and to the employer. The only major curtailment of benefits under Code Section 105 in recent legislation has been the elimination of the sick pay exclusion, with the exception of certain limited cases, by the Tax Reform Act of 1976.(fn2)
Unlike the rigid statutory framework for qualified retirement plans, Code Section 105 imposes minimal requirements for a plan to qualify under that section. The lack of specific guidelines, however, does result in some uncertainty as to the limits on benefits under plans.
The regulations under Code Section 105 provide two basic requirements for employer payments to qualify for the favorable tax treatment of medical expense plans.(fn3) The first is that payments be made pursuant to a plan or a program, policy or custom having the effect of a plan. The second basic requirement is that the plan be for the benefit of employees. The requirement that the plan be for the benefit of employees excludes sole proprietors and partners from utilizing such a plan for their own benefit, although it is still permissible for a plan to be established for the employees of a proprietorship or partnership.(fn4)
There is no statutory requirement that the plan be non-discriminatory and that it cover all employees on a reasonably equivalent basis. The plan may be for the benefit of one employee or more and different plans may be adopted for different employees or classes of employees. However, cases have held that there must be a rational basis for determining the classes of employees to receive differing benefits.(fn5)
The payments under the medical expense plan may be made from the general assets of the employer, through an insurance policy, or under virtually any other method either directly or indirectly from the employer. Consequently, the plan could be...
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