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What is a medical reimbursement plan?

A medical reimbursement plan is a tax shelter for the employer and the employee as well as a type of health savings account.

Unlike health insurance, a medical reimbursement plan does not deal with premiums, deductibles, or co-pays. Rather, it is a way of saving pre-tax dollars to reimburse you for medical expenses that are not covered by health insurance.

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Another benefit of a medical reimbursement plan is that it allows medical expense reimbursements not just for the employee but for spouses and dependents as well.

Additionally, reimbursements that are related to pre-existing conditions may also be eligible in the plan.

How Medical Reimbursement Plans Get Funded

Medical reimbursement plans can be funded by the employer or the employee. If an employee has a self-funded medical reimbursement plan then he will determine how much money of his salary will be put aside from each pay check to fund his medical plan.

There is a minimum and maximum amount that can be funded, such as a minimum of $10 per pay period and a maximum of $5,000 per year. This money is deducted from the employee’s pay check as pre-tax dollars, so the employee does not pay income tax on the money that is deposited into his medical reimbursement plan account.

Instead of self-funded employee plans, many employers choose to fund their employees’ medical reimbursement plans with corporate funds. These deposits are deducted from corporate dollars on a pre-tax basis, giving employers who choose this route a tax benefit in addition to other benefits similar to Cafeteria Plans (Section 125). If the funds go unused they return to the corporation instead of getting paid directly to the employee.

Regardless of who funds the medical reimbursement plan, the law dictates that the majority of employees must be eligible to participate in order to establish this type of plan. This means that a company cannot elect to create a medical reimbursement plan for only the top executives. The plan must be offered to everyone and the majority of employees must be eligible to participate or the plan can be disqualified.

Expenses Covered by Medical Reimbursement Plans

Not every expense is covered by medical reimbursement plans and the federal regulations outlining the plan are very detailed in this regard. Medical reimbursement plans are primarily intended to reimburse employees for health related expenses that are not covered by any health insurance plan.

The plan cannot be used to pay for any health insurance related expenses such as premiums, deductibles, or co-pays. While the rules were originally written to disqualify any non-prescribed medications, they were amended in 2003 to include many non-prescribed medications such as certain over the counter drugs and ointments.

Some expenses that may be covered by your medical reimbursement plan (provided they are not already covered by your health insurance plan) include acupuncture, ambulatory services, birth control, chiropractor services, corrective lenses (contacts or glasses), dentistry, diagnostics, doctor’s fees, fertility services, guide dogs, hearing aids, injections, nursing care, optometry, orthodontist services, prescription and some non-prescription drugs, rehabilitation for alcohol and drugs, smoking cessation, surgery, transportation (such as for your doctor’s visit), vaccinations, wheelchairs, and X-rays.

Additionally, some general preventive care such as bone density screenings and flu shots can be reimbursed by a medical reimbursement plan.

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Expenses Not Covered by Medical Reimbursement Plans

As discussed earlier in this article, any expense that is directly related to a health insurance plan, such as premiums and deductibles, are not eligible for reimbursement by a medical reimbursement plan. While some preventive care (such as health screenings) is covered, participation in a health and fitness center does not qualify as a reimbursable expense. Many over the counter prescriptions (such as allergy medication) are now allowed but most nutrition supplements and vitamins are not eligible for the plan.

Another expense that is ineligible is cosmetic surgery. Most cosmetic surgery is purely for aesthetic purposes and not considered to be a health related issue, therefore it does not qualify as a medical reimbursement plan expense. However, some cosmetic surgery may qualify if it is required to lessen or prevent a medical condition. One such example of this could be plastic surgery for the nose if it is being done to correct a deviated septum since a deviated septum is a physical disorder that can block the airway.

While not every employer offers a medical reimbursement plan, if yours offers one you should consider participating in it. As an employee funded plan you benefit from pre-tax dollars and as an employer funded plan you benefit by having your account funded for you.

Either way a medical reimbursement plan provides funds that can be used to reimburse you for a wide variety of health related expenses. A medical reimbursement plan is a great supplement to a health insurance plan but it is not a substitute for health insurance.

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