Medical Travel

Medical costs keep increasing and one novel way of coping with increased costs was highlighted in two articles.  The first, Is There a Doctor in the House, Wall Street Journal, August 21, 2006, writes about seeking medical care in Costa Rica, due cost savings.  The July 30, 2006 Los Angeles Times talks about outsourcing healthcare in the article, Overseas Surgery a Clamp on Costs by Daniel Yi.  The article states: "The savings can be sizable.  A coronary artery bypass surgery costs about $6,500 at Apollo Hospitals in India, Milstein estimated.  The average price in California is $60,400."  The article points out that some health plans cover approved providers in Mexico.

Medical expenses are deductible on Schedule A to the extent they exceed 7.5% of the Adjusted Gross Income, the bottom line on page 1 of the tax return.  Business may also cover health costs of owners and employees, with various choices available.

• What about the cost of travel?
  Would the long-distance travel for medical care be a deductible expense?  Code Section 213 permits the cost of transportation primarily for and essential to medical care.  If the taxpayer, for purely personal purposes, chooses to get an operation in a locality, such as a resort area, away from his or her home, no deduction is allowed, according to the RIA Federal Tax Coordinator.  But where significant cost savings are a key, as in the example from the Los Angeles Times, it would be difficult for the IRS to argue that the choice was for purely personal purposes.  After all, a saving of %54,000 isn't to be sneezed at.
   

• The Winderman Case
  There are no recent cases on this issue.   In Stanley D. Winderman, 32 TC 1997, a former employee and official in the IRS (now retired) flew from Los Angeles to New York to see his physician.  The opinion is very brief:
  
  Both sides were in agreement that if petitioner's trips to New York were taken primarily for medical purposes, the expenses in question are deductible.  We heard the evidence and were fully satisfied that petitioner's sole purpose in making the trips was to consult Dr. Greenwald professionally.  He had confidence in Dr. Greenwald, and we know of no rule of law that would require him to seek out another physician in Los Angeles as a substitute for Dr. Greenwald.  His trips to New York were made with the bona fide intention of obtaining the professional services of Dr. Greenwald.  The expenses in controversy are deductible.
   

• Take all legal deductions
  As we all struggle to deal wit the increasing medical costs, further study should be made of Code Section 213.  As the citations above indicate, this issue has not been litigated recently.  With increased outsourcing, such as travel to Costa Rica or India, these costs do add up and should be considered.  The law does provide a cap of $50 per night for lodging.  Additional costs, such as for a caretaker, could be deductible.  Please discuss these issues with our office.  Sometimes the law remains more static, but the methods of obtaining medical care change and the office must revisit the issue of new wine in old bottles.

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Most companies cover their employees' business expenses by reimbursing them for their actual expenses or by paying a travel or mileage allowance. Such arrangements are subject to strict tax rules concerning what qualifies as a legitimate reimbursement arrangement and what is treated (at least for tax purposes) as additional compensation to the employee.

According to the tax rules, the key distinction between a true expense reimbursement and disguised compensation is whether the employer's payments are made in accordance with what the IRS calls an "accountable plan."  (Such a plan basically requires employees to substantiate all reimbursed expenses and return any advances in excess of expenses incurred.)

If an employer has an accountable plan in place, expense reimbursements and allowances to employees who properly comply with the terms of the plan are deductible by the company (subject to the 50% limit for most meals and entertainment expenses) and nontaxable to the employees.  If a company maintains a non-accountable plan or an employee fails to comply with the company's accountable plan, expense reimbursements and allowances are still deductible by the company.  However, they are taxable to the employee as compensation.  Thus, such amounts are included on the employee's Form W-2 and subject to income tax withholding.  In addition, both the employer and the employee are subject to employment taxes on such payments.  Although the employee is allowed an offsetting deduction for the expenses reported on his or her Form W-2, the deduction is claimed as a miscellaneous itemized deduction and thus normally provides little or no tax benefit.

Because the tax ramifications of a non-accountable expense reimbursement plan are so unfavorable for employees and are potentially unfavorable for the employer, companies generally should us an accountable plan for employee expense reimbursements.  If you would like our help in establishing such a plan (or in ensuring that your current reimbursement policy complies with the requirements for such a plan) please contact us.  We would be glad to assist you.