Prepaid Medical Insurance

Health insurance - is it deductible

Today TaxMama hears from Elaine in the TaxQuips forum, who tells us. “I have a client that is retiring now at age 55. He will receive $185,000 in deferred compensation. The company will withhold $111,000 for lifetime medical insurance for him. Can the whole $111,000 be deducted in the year paid?”

Dear Elaine,

Wow! Double WOW!

Hey, who knows if the insurance company is even going to be in business for his whole life? This is SO not cool.

Your client is having to pay the premiums himself? Then why pay it all up front. If it’s not too late, advise your client to rethink this arrangement. Why shouldn’t he use the money during his lifetime, and just pay his few thousand each year?

He’s really only getting about $75,000. Yet, this increases his AGI needlessly. It probably puts him into AMT – needlessly.

Even IRS won’t let you deduct a lifetime’s worth of premiums all at once. You will have to amortize them each year. (Scroll down to Prepaid Insurance Premiums in the link to IRS Publication 502)

The ONLY justification I can see for the prepaid premiums is that they are part of some kind of pre-tax plan that reduce the client’s taxable income. See if that’s what it is. Then, you won’t need to worry about deducting the premiums.

Even so…he’s better off with the money and getting the special COBRA credit for 18 months (or whatever the limit is) and paying the full annual premium afterwards, with the money he’s banked.

I hope you can catch this before your client gets the short end of the stick…unless I’m missing something?

And remember, you can find answers to all kinds of questions about prepaid expenses, and other tax issues, free. Where? Where else? At TaxMama.com.

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5 thoughts on “Prepaid Medical Insurance

  1. Blakely Sanford says:

    Both of your thoughts are good. Yes I would have him ask a lot more questions too. My thought was that once he is no longer an employee and the cobra runs out, he may no longer qualify for the insurance and the prepaid plan for 10 years maybe the solution. I thought of restructuring the deferred comp, but once he bridges the risk of forfeiture gap, it all becomes taxable too.

  2. Suzan Ali says:

    Dont forget to calcualate the present value of the $111,000 versus the present value of the premiums taking into consideration the client’s current health status and medical history.

  3. TaxMama says:

    Hi Blake

    Good point.

    But insurance companies don’t cancel you when you have an existing policy.

    So why can’t he keep this policy and pay premiums annually instead of up front?

    I think the options are worth exploring, rather than just paying all the premiums up front. Wouldn’t you advise your client to ask questions?

    Hugs
    Eva

  4. Blakely Sanford says:

    I dont know that this prepaid medical insurance is such a bad deal. Yes he will have to pay taxes on the money, but consider that he may not be insurable in the future and he wants to continue the same coverage and benefits he currently has. Retiring at 55 with Health insurance that may cost $12,000 per year for the next 10 years until medicare and then longer as a medi-gap insurance. He very well could pay far in excess of $111,000.

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