Washington Tax Alert November 17, 2008 – Accrual of Medical Expenses

Washington Tax Alert from Don Barnes, [email protected]
November 17, 2008

The Service recently issued a technical advice memorandum (see TAM 200846021) in which it permitted an employer to accrue expenses incurred under a self-insured medical and dental plan for its employees, even though the employer did not pay some of the medical and dental expenses within 2-1/2 months of year end.

Over the past ten years, many taxpayers have filed accounting method changes to accelerate the deduction of medical and dental expenses under self-insured plans where the employer directly pays the claims, rather than the employee paying the claim and seeking reimbursement under the employer’s plan. However, taxpayers have generally limited their accruals to amounts paid within 2-1/2 months of year end.

In TAM 200846001, the National Office permitted a calendar year employer to accrue all expenses for medical and dental services provided during the tax year under a self-insured plan, even though the employer did not pay a portion of the expenses by March 15 of the following year. The Service based its conclusion on two findings — viz., (i) the medical and dental plan was not a welfare benefit plan under IRC § 419(e), and (ii) the employees’ eligibility for reimbursement under the plan was determined by whether the employee was a participant on the date the medical or dental services were provided.

Some taxpayers will be able to rely on this technical advice memorandum to increase their year end accruals.