What amount can employer deduct for expenses paid to group health plan for his employees under special rule for certain group health plans

Subject: “What amount can employer deduct for expenses paid to group health plan for his employees under special rule for certain group health plans?”

RESEARCH ASSIGNMENT: SPECIAL RULE FOR CERTAIN GROUP HEALTH PLANS

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Section 162(a) of the internal revenue code provides for deduction of ordinary and necessary expenses incurred or paid in a particular taxable year during trade or business. Group health plan is defined by Federal Tax Regulation 1.162 as a health plan that an employer contributes to in order to provide health care to his employees or individuals having a business relationship with the employer or their family members. According to section 162 of the internal revenue code, deductions are not allowed to an employer for an amount he incurs for group health plan if it doesn’t reimburse for inpatient care services at the rate of commercial insurers, health maintenance organizations, or a corporation organized under the insurance law. However, this does not apply if the New York state laws do not require reimbursement at the above rates.

The conclusion we get is that expenses paid to a group health plan qualifies to be necessary and ordinary expense and occurs during course of business. However, there is a prohibition if the plan does not meet a certain threshold for reimbursement for inpatient care. Therefore, an employer can deduct expenses paid to a group health plan if the plan reimburses for inpatient care services at a rate specified by the insurance law. However, there is no standard deductible amount as long as the plan reimburses the correct rates.

In United States v. General Dynamics Corp., the following three questions were to be answered:

• Are the expenses incurred by General Dynamics Corp., for its employee medical plans deductible as ordinary and necessary business expenses?
• Was the deduction made at the correct time?
• Did the deduction satisfy “all events” test, as:
  1. Is the liability of the employer established after an employee or his dependent has received the medical services or before receiving the same
  2. Whether the acts of resulting to filing of claims and processing of the same were guided by liability or were they ministerial
  3. Whether the aggregate-estimate system used by the employer to determine the liability was reasonable and logical

For question one, the court determined that it was undisputable that the expenses were ordinary and necessary and were in the course of doing business. For question number two, the court held that it was not the correct time as being an accrual basis taxpayer, the taxpayer should have claimed the deduction for paid liability instead of reserve accounts. For question number three, the court held that it failed the test because it depended on an estimate rather than actual liability based on the events that occurred during the specific financial year.

Works Cited

Text of United States v. General Dynamics Corp., 481 U.S. 239 (1987)

IRC 1.162