Six years ago, companies could reimburse key executives for such out-of-pocket health care costs as physical examinations and dental work, then deduct those amounts as ordinary business expenses. But Congress outlawed the practice in 1979.
Now, however, a group of enterprising insurance carriers has come up with a way to get around the ban. The loophole, it turns out, is a section of the law that permits companies to deduct the benefits if they are provided through insurance policies.
The insurance carriers' scheme involves what are called medical-reimbursement plans. The policies generally work like this: Say an executive incurs a health care expense not covered by his company's regular major-medical plan, such as eyeglasses or a child's braces. He submits the bill to his employer, who forwards it to the medical-reimbursement plan carrier. The carrier reimburses the executive for the expense, then sends an invoice to the company for that amount, plus a 10% to 13% handling fee.
The policies also include so-called stop-loss coverage. It caps an employer's liability when claims exceed a certain agreed-upon limit -- usually $2,500 to $5,000 per person for a group of four to six top executives.
The cost of medical reimbursement coverage varies with each carrier. But a typical plan charges a base fee of $175 for the first executive and $100 for each additional executive. That amount covers the cost of stop-loss insurance, but is in addition to direct-reimbursement expenses.
The primary selling point of the policies is that they enable businesses to provide key executives (including the companies' owners) with an additional fringe benefit. As a rule, executives would rather be reimbursed for medical expenses than deduct those amounts on their individual tax returns. That's because medical costs are deductible only to the extent that they exceed 5% of an individual's adjusted gross income.
Estimates are that as many as 30 separate insurance carriers offer medical-reimbursement plans. So far, however, none of them have actively promoted the medical-reimbursement product, though, and chances are that they won't. "The IRS is closing loopholes right and left," says one insurance executive. "People are a little afraid to attract too much attention to this subject."