Here are the answers to five common inquiries about Section 105 Medical Plans, including their exemption from the Affordable Care Act. The information below was provided to us from Bradford Tax Institute.
It’s a nearly perfect plan for the one-owner business because it can create deductions where none existed before— and for those health care deductions that did exist, it almost always increases the tax benefits.
In this article, we answer five questions about the Section 105-HRA plan.
My spouse and I have a partnership LLC, and we each have S corporations. Mine has two W-2 employees in addition to me. Can we use the partnership to establish a Section 105-HRA that covers my spouse only?
For the purposes of any Section 105-HRA plan, your employees are far more numerous than you might think. First, you need to consider all the businesses owned by you and your spouse. All employees found in these businesses are deemed by Section 105 to be your employees, and remember, the 105-HRA is a plan that works with one eligible employee only.
Your two W-2 employees ace you out of the Section 105-HRA that we describe in Blueprint for Employee-Spouse 105-HRA (Health Reimbursement Arrangement).
If you pay the health insurance with the partnership and treat the payments as guaranteed payments to the partners, or if you pay the health insurance through the S corporation and have it included on your W-2, you can qualify to deduct the health insurance on your Form 1040 as self-employed health insurance.
If you also want to cover the two non-family-member S corporation employees, you need a separate plan. Two options are the ICHRA and the QSEHRA.
Is there any specific regulation that states Section 105-HRA medical reimbursements need to be made monthly? Or can I make one reimbursement at year-end for the entire year’s worth of medical expenses, so long as we have everything properly documented?
There are no specific regulations on when to reimburse the employee. You could do it once a year.
But keep this non-tax-rule in mind: perception is reality. You look more like a real business when you reimburse expenses no less than monthly. You want an IRS examiner to have a first impression that you are a real business.
Using the Section 105 plan, can my employee-spouse also be paid with W-2 wages if her reasonable compensation exceeds the amount of reimbursable medical expenses?
Yes. In fact, this is preferred by many tax pros because you have the W-2 proof of employment.
But there’s no requirement for a W-2. The Section 105-HRA can be the sole source of remuneration. For more on this, see Q&A: Proof for the IRS That No W-2 Is Needed for the 105 Plan
I purchased a long-term care policy for myself and my spouse. Can I include the premiums as reimbursable expenses with my 105-HRA plan?
Yes, and that gives you a full deduction for the premiums that’s not limited by the ceilings. See Better Deductions for Long-Term Care Insurance Costs.
We decided to immediately set up a Section 105 plan to take advantage of my health care plan that is part of my pension. So, I’m now my spouse’s employee, doing tax prep and records management for her. I have a question as we get started.
She’s paying me in health care reimbursement only—no salary. She has a SEP IRA plan for her sole-proprietor business. Would she have to contribute to a SEP IRA for me at 20 percent of the amount I am reimbursed for the Section 105 plan?
No. The money you receive via the Section 105 plan is a reimbursement for medical expenses (i.e., a non-taxable fringe benefit). It is not compensation for purposes of a retirement plan, so your employer-spouse would not have to contribute any amount to a SEP IRA on your behalf.
When considering a Section 105-HRA, you must consider all businesses owned by you and your spouse. If you have more than one W-2 employee across all businesses, you can’t make the spouse-designed 105-HRA work for you.
There are no set rules on when to reimburse an employee under a Section 105-HRA plan. While it can be done yearly, monthly reimbursements can offer a more businesslike perception.
An employee-spouse under a Section 105 plan can indeed be compensated with W-2 wages. This can provide solid proof of employment, though it’s not required.
Premiums for long-term care policies can be included as reimbursable expenses in a 105-HRA plan. This allows for a full deduction of the premiums, not constrained by any ceiling.
A Section 105 plan operates as a reimbursement for medical expenses and is not considered compensation for purposes of a retirement plan. Thus, if an individual is paid only through health care reimbursements, there is no requirement for additional contributions to a SEP IRA.
July 20, 2023 | DWHuff Consulting
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