Many businesses provide health coverage for their employees. However, a large number of them are self-insured, meaning they do not purchase insurance coverage for their employees. Instead the businesses pay for their employees' health needs out of their own assets. To assist them with the plans, the businesses will hire a health insurance company (the Administrator) to administer the employees' claims for them. There are two ways an employee's claims are typically handled:

1. When an employee incurs an expense for medical services (for example for a doctor visit or a prescription), the employee pays for the costs and must submit a claim for reimbursement to the Administrator who evaluates the claim and obtains funds from the employer for use in reimbursing the employee.

2. When an employee incurs an expense for medical services, the doctor or pharmacy submits the claim form to the Administrator who evaluates the claim and obtains funds from the employer for use in reimbursing the doctor or pharmacy.

Assignment:

1. Read the case and revenue ruling and explain under the two scenarios above when the business (assume it uses the accrual method of accounting) may accrue and deduct the cost of medical servicesunder each of the two scenarios above. Be specific in how the case or the revenue ruling supports your answer.

For example, assume an employee goes to the doctor on December 1, 2016 and incurs $1,000 in medical bills. When may the business accrue and deduct the claim for reimbursement if the claim form is submitted in January 2017 (assume the business is a calendar year taxpayer) under each of the two scenarios?

2. Skim Rev Proc 2016 - 29 and summarize the section that allows a taxpayer to change its method of accounting for when it may claim a deduction of its accrued medical liability.