Seven Answers to Section 105-HRA QuestionsTax Planning
The Section 105-HRA plan can have big benefits for the sole proprietor and the single-member LLC with no employees other than the spouse.
It also works well for owners of C corporations who operate the business by themselves.
In this article, we answer eight questions about the 105-HRA plan. Let’s get started.
I set up my 105-HRA plan some years ago. My only employee is my spouse, and I pay all the insurance, medical bills, and drug costs from our joint checking account but keep detailed records of all expenses. Does that work for the IRS?
You will have trouble, and you might not survive an IRS audit.
Here’s what you should do: Have your spouse pay the bills from a single account in the spouse’s name. Then reimburse your spouse from your business account for all the medical expenses.
Remember, this is an employee benefit for the employee-spouse. You get your coverage from your employee spouse who has family coverage.
You want to create a paper trail that shows your business reimbursing your employee-spouse for the medical expenses.
Are any minimum work hours required per week for the employee-spouse?
No, but there should be sufficient hours of work at a given rate equal to or greater than the medical expenses to justify the amount of the reimbursement.
Example. Your 105-HRA reimburses your employee-spouse $20,000 for the year. On the open market, your spouse’s work product on your behalf has a market value of $40 an hour. Divide the $20,000 by $40, and you’ll find that your spouse needs to work 500 hours to justify the $20,000 in medical fringe benefit.
Key point. In this example, we are not paying a salary. The total pay is the 105-HRA fringe benefit.
If I have a Section 105 plan, where do I record all those medical and drug deductions for me and my employee on Schedule C?
Form 1040, Schedule C, Line 14, Employee benefit programs.
I am an independent contractor who files on Form 1040, Schedule C. I don’t have a 105-HRA or other business plan that I can use for my medical expenses. Where on Form 1040 can I deduct my insurance premiums?
Your health insurance deduction goes on Form 1040, Part II of Schedule 1, which creates a tax deduction against your gross income.
My questions mostly revolve around what is needed to get the plan set up. How is it filed, and is this done by me or through a CPA? Does it only benefit approved medical expenses starting from the date it’s set up, or can I use it to deduct expenses for the entire tax year for which it is set up?
As an employer, you create your own 105-HRA for your company.
You don’t have to file any paperwork. Just keep it handy for any potential audit.
You can do it yourself or have your accountant take care of it for you. It’s also a good idea to have your lawyer look over the plan document.
Your 105-HRA may not
- reimburse a medical care expense incurred before the date the 105-HRA is in existence, or
- reimburse a medical care expense incurred before the date an employee first enrolls in the plan.
As a more than 2 percent owner with my spouse and me as employees (and no other employees), I have a question about S corporations and Section 105: Can I still take some form of deduction through Section 105?
As a shareholder-employee who owns more than 2 percent of an S corporation, you don’t gain benefit from a Section 105 plan or another health reimbursement arrangement (HRA).
If the S corporation reimburses you using a health reimbursement plan or account, it simply creates W-2 treatment for you and deducts the wage expense. If health insurance costs are included in the reimbursement, you would deduct the health insurance costs included in your W-2 using the self-employed health insurance deduction on Schedule 1 of Form 1040.
For medical reimbursements other than health insurance that the S corporation reports on the W-2, you would have to itemize those deductions on Schedule A of Form 1040.
I’m trying to figure out how to reimburse my employee-spouse for his medical insurance premiums using the
provisions in Section 105. It seems pretty straightforward, but my accountant says that since his paycheck contributions are pre-tax dollars, any reimbursements I make to him are taxable to him. Is that correct?
Your accountant is correct. Your spouse already has a tax deduction for the health insurance. That’s what the pretax means.
So, no double-dipping. But your insurance is deductible if you cover your employee-spouse with a family plan. Also, all the co-pays and other out-of-pocket medical costs qualify for the 105-HRA plan.
This article provides key information on Section 105-HRA plans, which can benefit sole proprietors, single-member LLCs with no employees other than a spouse, and owners of C corporations who run the business themselves. The main takeaways are as follows:
- To avoid trouble with the IRS, reimburse your employee-spouse from your business account for all medical expenses.
- No minimum work hours are required for the employee-spouse, but the reimbursement amount should be justifiable based on the work performed.
- Report Section 105 plan deductions on the tax forms under the employee benefit program category. For the proprietorship, this is on Form 1040, Schedule C, Line 14.
- Health insurance deductions for independent contractors without a 105-HRA plan go on Part II of Schedule 1 on Form 1040.
- Employers can create their own 105-HRA plan and don’t need to file any paperwork. The plan can only reimburse expenses incurred after its creation and the employee’s enrollment.
- More than 2 percent S corporation owner-employees gain nothing additional from a Section 105 plan.
- Reimbursing employee-spouses for their pre-tax medical insurance premiums is a double-dip and results in taxable reimbursements.