Tax deductible expenses are almost any "ordinary, necessary, and reasonable" expenses that help to earn business income. Deductible expenses are those that can be subtracted from a company's income before it is subject to taxation. Most companies reimburse employees for well defined business-related expenses; travel, entertainment, gifts, and other expenses pertaining to the employer's business activity can be reimbursed tax-free.
The typical business expense process is simple and effective:
The employee incurs predetermined business expense(s).
Expense(s) must be proven (usually through a receipt or bank statement).
The employer reimburses the employee within a predetermined time period.
Healthcare Reimbursement Plans
Many employers throughout the country are taking a similar approach to healthcare by setting up a formal Healthcare Reimbursement Plan or HRP. In order to reimburse employees for health insurance tax-free, the business expense account or HRP must meet certain requirements of the IRS:
There must be a business connection.
The funds must reimburse qualified health insurance premium expenses.
The business can only legally reimburse employees for specific health expense.
Expenses must be substantiated.
Any amount received by an employee in excess of actual expenses must be returned to the employer.
Substantiation means the employer must be able to identify the specific nature of each expense and determine that the expense was business-related. Expenses may not be aggregated into broad categories, and they may not be reported using vague terminology.
Unlike Business Expense Accounts, HRPs are Subject to the HIPAA Privacy Rule. In order to administer an HRP correctly, the employer must ensure that the employee reimbursement requests are substantiated in compliance with HIPAA. As a result, virtually all companies use a third-party to handle the premium expense substantiation process.
If the company's Business Expense Account plan or HRP meets all of the requirements mentioned above, then all money received by an employee under the plan is excluded from the employee's gross income and deductible to the business.
A Healthcare Reimbursement Plan (HRP) is an employer-funded, mutually beneficial plan for both employer and employee. Just like Business Expense Accounts, HRPs reimburse employees for substantiated individual health insurance premium expenses. HRPs are a portable, permanent, and simple solution for offering health benefits.
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