Academic journal article Journal of Accountancy

Funding Medical Expenses: Alternative Ways to Pay Medical Bills

Academic journal article Journal of Accountancy

Funding Medical Expenses: Alternative Ways to Pay Medical Bills

Article excerpt

Taxpayers needing to fund large and/or ongoing medical expenses should explore tax-minimizing ways to pay them beyond deducting them under the 7.5% of adjusted-gross-income threshold. Potential alternative funding vehicles are described below. CPAs should become familiar with such mechanisms to aid eligible clients.

CAFETERIA PLANS

IRC section 125 cafeteria plans are the most common taxpayer-friendly medical expense reimbursement arrangements (after medical insurance). Employee contributions fund flexible spending accounts (FSA) on a pretax, salary-reduction basis to provide coverage for specified expenses (qualified medical expenses or dependent-care-assistance costs, for example) incurred during the coverage period.

Reimbursement is subject to reasonable conditions. Participants must use FSA amounts for the specified expenses or forfeit any amounts remaining as of the plan yearend.

HRAs

Another alternative may be a health reimbursement account (HRA), which reimburses employees for medical expenses other insurance doesn't cover. In general, employers fund HRAs--without employee salary reductions--to reimburse workers for substantiated medical care expenses incurred by the employee and his or her spouse and dependents. HRAs typically provide reimbursement up to a maximum dollar amount per coverage period, and may provide for a carryforward of any unused amount.

IRA WITHDRAWALS AND 401(k) ROLLOVER BALANCES

Individuals may take withdrawals as needed from their IRAs and/or certain 401(k) or other qualified plan account balances (rollover account balances, for example). …

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