Avoid This Husband-and-Wife LLC MistakeTax Planning
My wife and I currently have a flow-through LLC in which we are both members. My wife is the real estate sales professional. Her broker pays the LLC and gives her a 1099 at the end of the year.
I’m the fixing, research, how-to-add-numbers, and advertising guy.
We think we could benefit from a Section 105 health reimbursement arrangement (HRA).
- Would a Section 105 plan work with our husband-and-wife LLC?
- If not, what entity do we need to make this work?
- Can the 105 plan cover the full year?
We currently have a health savings account (HSA). If we set up the 105-HRA, can we still add to the HSA, for tax savings?
The Section 105 plan will not benefit the spouses in a husband-and-wife partnership.
To make the 105-HRA plan work, you need your wife to operate as a sole proprietorship with you as the sole employee. You may have that in place now—but you may not be aware that the proprietorship exists.
You described your entity as a husband-and-wife LLC. With no election for taxation as a corporation, the husband and- wife LLC is a partnership. In your case, that would be the worst type of entity for tax savings for you and your wife.
One Easy Way to Make the Partnership a Sole Proprietorship
If you live in a community property state, you can elect to treat the husband-and-wife LLC as a sole proprietorship by simply filing your tax return as a sole proprietorship on Schedule C of your Form 1040.
105-HRA Effective Date
Your 105-HRA may not reimburse a medical care expense incurred before
- the date the 105-HRA is in existence,
- or the date an employee first enrolls in the 105-HRA.
This means you need to get the 105-HRA plan in place now so that you can start reaping the benefits right away.
HSA with the HRA
As to the HSA in combination with the 105-HRA, be careful here. In general, the HSA is not compatible with the Section 105 plan.
But if you have a high-deductible health plan and no HSA, then there’s no impediment to the Section 105 plan paying for all medical expenses, including the high-deductible health plan.
The husband-and-wife LLC taxed as a partnership is a poor entity for tax savings.
If you live in a community property state, you can turn a husband-and-wife partnership into a sole proprietorship by simply filing a Schedule C with your tax return.
In a husband-and-wife business that’s operated as a proprietorship, the Section 105-HRA is a terrific tax savings vehicle for the family’s medical expenses.
If you desire both an HSA and a Section 105-HRA, know first that the plans are not compatible and that you need to follow the rules.