Medical Reimbursement Policy
What is a Medical Reimbursement Plan?
A Medical Reimbursement Plan can be an effective way for churches to provide medical care for their pastors and/or lay employees. In order for a plan to be a legitimate Medical Reimbursement Plan the following criteria must be followed:
1. Medical Reimbursement Plan’s are funded solely through salary reduction.
2. A Medical Reimbursement Plan is a “use it or loose it” plan. Unused funds cannot become salary or any other benefit.
3. Non-discrimination rules apply and the plan must be made available to all employees who are full-time (30 hours or more per week). Not all full-time employees are required to participate, but the plan should be available to all.
4. Medical Reimbursement Plan’s may only be used to reimburse employees for medical care for themselves, their spouse or their dependents.
5. Reimbursements can only be made for substantiated medical care expenses.
The benefits of an Medical Reimbursement Plan?
1. When there is only one full-time employee, the church may reimburse the pastor/employee for medical insurance. This may be especially helpful if the medical insurance provider will not accept a church check for payment of premiums.
2. Distributions of Medical Reimbursement Plan funds to reimburse or pay an employee’s medical expenses are not taxable for federal, state or self-employment.
Here is a sample Medical Reimbursement Policy which your church can adopt as their own.
Note to churches:
Paragraph #4 can be omitted if immediate reimbursement is available to the employee.
There are two paragraphs numbered “6”. The church must choose which paragraph 6 to use. You can have a two and a half month grace period OR you can carry forward up to $500 but you cannot offer both. This is an employer decision not an employee decision so you cannot offer your employee(s) the choice.
“Name of your Organization”
Medical Reimbursement Policy
In an effort to reduce the potential for added out-of-pocket health expenses to our full-time employees the “Name of your Organization” has seen fit to establish a Medical Reimbursement Plan (MRP). The Internal Revenue Service requires that certain conditions exist in order for a Medical Reimbursement plan to be considered non-taxable. The Medical Reimbursement plan of the “Name of your Organization” will be subject to the following conditions:
1. The Medical Reimbursement Plan will be available to all full-time employees of the “Name of your Organization”.
- Participation is voluntary, not mandatory.
2. The Medical Reimbursement Plan will be based on a voluntary salary reduction.
- Employees wishing to participate must fill out a Voluntary Salary Reduction form (attached) and turn it into the bookkeeping office by December 1st.
- The salary reduction will apply beginning January 1st of the year following receipt of your Voluntary Salary Reduction form and ending December 31st or the last day of employment, whichever comes first.
- New employees must turn in a Voluntary Salary Reduction form prior to receiving their first paycheck.
3. You will be reimbursed for deductible out-of-pocket medical expenses.
- Only out-of-pocket expenses that are not covered by a medical plan are eligible for reimbursement.
- You may be reimbursed for Medical and Dental payments that would be includible on Schedule A of your Federal return if you were not reimbursed under this plan. (See attached list of what is and what is not deductible).
- You CANNOT be reimbursed without turning in receipts. If you fail to obtain a receipt from your doctor, dentist or pharmacist, you will be unable to be reimbursed.
4. You will be reimbursed as the funds become available through your payroll reduction.
- If you elect to reduce your salary by $1300 a year so that you have $1300 available for Medical Reimbursements and you are paid year round, then $50 ($1300 divided by 26 pay periods) will be available to you for reimbursement each pay period.
- This means that if you request a $100 reimbursement on January 5th and your first paycheck is written on January 7th, then $50 will be reimbursed on January 7th and $50 will be reimbursed on January 14th.
- If you request a $100 reimbursement on January 18th, and you have had no previous requests for reimbursement, then you will be reimbursed the full $100.
5. The Medical Reimbursement Plan will be a use it or loose it plan.
- You will loose any excess funds left in your Medical Reimbursement Plan at the end of the plan term.
- Careful thought should be given not to over estimate the amount you wish to set aside for Medical Reimbursements as any funds left over cannot be redesignated as salary.
- You may wish to buy eyeglasses or catch up on dental work prior to the plan end rather than loose any left over funds.
Paragraph 6 Option 1
6. The Medical Reimbursement Plan will include a carry forward to the following year.
- Up to $500 of left over funds in your Medical Reimbursement Plan will be carried forward to the following year’s plan.
- The amount carried forward will be the smaller of $500 or the amount remaining in your Medical Reimbursement Plan as of December 31st.
- Any amounts over $500 remaining in your Medical Reimbursement Plan as of December 31st will be forfeited.
Paragraph 6 Option 2
6. The Medical Reimbursement Plan will include a two and a half month grace period.
- Funds remaining in your Medical Reimbursement Plan as of December 31st will be available until March 15th.
- You may be reimbursed for expenses from your previous year’s plan if funds are available and receipts and documentation are submitted by March 15th.
- You may be reimbursed from your previous year’s plan for expenses incurred through March 15th.
Here is a sample form for employees to fill out.
“Name of your Organization”
Request for Medical Reimbursement Plan
Voluntary Salary Reduction
Please set aside $_______________* of my salary for the calendar year of 20____ for a Medical Reimbursement Plan. I understand that my salary for the calendar year will be reduced by the amount of $_______________* in order to make available funds for reimbursement of my deductible out-of-pocket Medical expenses.
Signature of Employee
I understand that participation in this program is not mandatory and I am participating voluntarily.________
I also understand that I will not be reimbursed if I do not submit proper receipts or documentation.________
I further understand that if I do not use all of the funds I will loose whatever funds are “left over” when the reimbursement period ends.________
* These two (2) amounts are the same.
Here are the qualified Medical and Dental Expenses.
Medical and Dental Expenses
Examples of Medical and Dental Payments You May Deduct
- Insurance premiums for medical and dental care, including premiums for qualified long-term care contracts as defined in Pub. 502. (This cannot be reimbursed when there is more than one full-time employee.)
- Prescription medicines or insulin.
- Nonprescription medicines (including pain relievers, antacids, cold medicines and allergy drugs) obtained with a prescription.
- Medical doctors, osteopathic doctors, dentists, eye doctors, podiatrists, chiropractors, psychiatrists, psychologists, physical therapists, occupational therapists, acupuncturists, and psychoanalysts (medical care only).
- Medical examinations, X-ray and laboratory services, insulin treatment, and whirlpool baths your doctor ordered.
- Nursing help (including your share of the employment taxes paid). If you paid someone to do both nursing and housework, you may deduct only the cost of the nursing help.
- Hospital care (including meals and lodging), clinic costs, and lab fees.
- Qualified long-term care services (see Pub. 502).
- The supplemental part of Medicare insurance (Medicare B).
- A program to stop smoking and for prescription medicines to alleviate nicotine withdrawal.
- Medical treatment at a center for drug or alcohol addiction.
- Medical aids such as eyeglasses, contact lenses, hearing aids, braces, crutches, wheelchairs, and guide dogs, including the cost of maintaining them.
- Surgery to improve vision including radial keratotomy or other laser eye surgery.
- Lodging expenses (but not meals) while away from home to receive medical care in a hospital or a medical care facility related to a hospital. No more than $50 a night for each eligible person.
- Ambulance service and other travel costs to get medical care. If you used your own car, you may claim what you spent for gas and oil to go to and from the place you received the care; or you may claim 23.5 cents a mile for 2014. Add parking and tolls to the amount you claim under either method.
Examples of Medical and Dental Payments You May Not Deduct
- Insurance premiums for medical and dental care, including premiums for qualified long-term care contracts as defined in Pub. 502. (This may be reimbursed when there is only one full-time employee.)
- The basic cost of Medicare insurance (Medicare A). If you were 65 or older but not entitled to social security benefits, you may deduct premiums you voluntarily paid for Medicare A coverage.
- Cosmetic surgery unless it was necessary to improve a deformity related to a congenital abnormality, an injury from an accident or trauma, or a disfiguring disease.
- Life insurance or income protection policies.
- The Medicare tax on your wages and tips or the Medicare tax paid as part of the self-employment tax or household employment taxes.
- Nursing care for a healthy baby.
- Illegal operations or drugs.
- Nonprescription drugs, vitamins and supplements.
- Travel your doctor told you to take for rest or a change.
- Funeral, burial, or cremation costs.
Whose Medical and Dental Expenses Can You Include?
You may include medical and dental bills you paid for:
- Yourself and your spouse.
- All dependents you claim on your return.
- Your child whom you do not claim as a dependent because of the rules explained in Pub. 501 for children of divorced or separated parents.
- Any person you could have claimed as a dependent on your return if that person had not received $3,900 or more of gross income or had not filed a joint return.
Example. You provided over half of your mother’s support but may not claim her as a dependent because she received wages of $3,900 during the tax year. You may include on line 1 any medical and dental expenses you paid during the tax year for your mother.
Note: The Affordable Care Act appears to have affected the ability of some to use a MRP to pay for individual medical insurance premiums. We are not experts in this area and you may need to seek counsel from some other source.