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Author: lunchbeast Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121144  
Subject: Self-employeed health care tax maneuver Date: 11/28/1999 3:11 AM
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I am a self-employeed consultant using an S-corp organization for my company. Because of escalating costs and high deductables, along with some elective surgery I'm considering, I've been looking at replacing my current health care policy with an MSA. I was recently discussing health care insurance costs with a friend who is also a self-employeed S-corp, and he explained how he handles his insurance.

Instead of funding the cost of the insurance policy at the employee level, he has made health care a 100% company-paid benefit. All health expenses (health insurance, prescription and non-prescription medication, bandages, office visits, transportation, etc.) are completely paid by his company. He then passes the cost of only the health care policy along to the employee as a taxable benefit. His company absorbs the extra costs above and beyond the coverage of the insurance policy and takes tax deductions for them.

For example, his company picked up the tab for the cost of braces for his daughter beyond what the insurance covered, and his company also picked up the cost of LASIK eye surgery (for nearsightedness) for him. He has his company then withhold taxes on the premium for the health insurance, just as it might for a bonus or vacation pay. In essence, all of his medical expenses are paid with pre-tax dollars, without limit, and without the incumbrance of the very high deductable of an MSA

I ran this by a CPA, and her feeling is that this is all OK as long as all employees are treated the same. Since he's the only employee, there's no problem there. My feeling is that I'm overlooking something here, and that this would not be looked upon favorably by the IRS, if for no other reason than the compensation on which taxes are withheld may not accurately reflect the value of the benefit

I'd appreciate any insight anyone might have on whether or not this is really legitimate.
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