Scott Summers is an optometrist. Until recently, he was working at Dallas Marvelous Hospital. Scott is smart and driven. After being hired by the hospital, he quickly rose through the ranks and became the resident optometrist. The hospitals manager, Charles Xavier, really appreciated Scotts dedication and always made sure to reward him.

While working for the hospital, Scott met the love of his lifeJean Grey. Scott felt so well understood by Jean. He felt as if she knew exactly what he was thinking. Scott and Jean married after dating for a couple of years. The ceremony was beautiful except for one of Jeans old boyfriends, Logan, crashing the party and making a scene.

Jean was an internal auditor for the hospital until she married Scott. Once they married, she quit her job to take care of their home. Scott and Jean still have no children.

Last year, Charles Xavier passed away. He had been the heart and soul of the hospital for decades. After his death, things quickly changed. The hospital became more business minded and no longer seemed to care about its patients. Suddenly, Scott felt like a stranger in the same place he had worked in for years.

The stress at work caused stress at home. Scott and Jean have been arguing constantly.

Scott came to see us (the CPA firm) because he is starting his own practice. He is tired of working at the hospital. He also wants to salvage his marriage. Scotts question is about health insurance. The hospital provided great

benefits to the doctors, nurses, and staff. Everyone received free (i.e., paid by the hospital) health insurance for themselves and their families. Scott wants his private practice to offer the same benefit to himself and his employees.

Scott hired an attorney who set up his new practice. The lawyer set up the practice as a limited liability company in the State of Texas. Also, the lawyer filed an election with the IRS to have the practice taxed as an S corporation.

Scotts practice will only have a few employees (probably four, including himself). The small number of employees may impede the practice from obtaining a group health insurance policy covering him, the other employees, and their families. Scotts idea is for every employee, including himself, to obtain his or her own health insurance policy (the policy would cover the employee and the employees family). The practice would then reimburse each employee for his or her costs of health insurance.

Scott does not want to be shortsighted and is asking whether this health insurance reimbursement plan is acceptable. He wants do things by the book. Would the reimbursement for health insurance paid to employees be tax-free (for the employees)? Are there any downsides of which Scott should be made aware? Write a memorandum answering these questions.