Section 105 Plan Explained
Section 105 of the Internal Revenue Code allows employers to establish a written plan to reimburse medical expenses. There are numerous variations of the Section 105 plan including: Health Reimbursement Arrangements (HRAs), Medical Expense Reimbursement Plans (MERPs), Health Flexible Spending Arrangements (FSAs), Accident and Health Plans (both insured and self-insured), and more.
Core Documents specializes in the FSA and HRA variations, and the one-person 105 HRA form of Section 105 of the Code. See: www.Core105.com
Section 105 Plan as it pertains to an Accident and Health Plan
The IRS affords for an Accident and Health Plan pursuant to Section 105 of the Code. This type of plan encompasses Revenue Ruling 71-588, is supported by Letter Ruling 9409006, and meets the compliance regulations of other government agencies including the Department of Labor (DOL) and the Employee Retirement Income Security Act (ERISA).
The concepts surrounding both the rulings and the Code allow for a self-employed individual to employ his/her spouse who is active in the business, and to offer that employed-spouse a medical benefits package. The benefits offered cover the employee, the employee’s spouse, and the employee's dependents.
In reality, this allows the self-employed individual to deduct 100% of his/her family's health costs from federal, state, and FICA/Medicare taxes. Standard tax law allows healthcare premiums to be deducted at 100% from federal and state taxes, leaving a substantial amount of potential tax savings on the table.
Benefits of the Plan
A Section 105 Plan allows a qualified business owner to deduct 100% of
Health insurance and dental insurance premiums for eligible employee(s) and family. This also includes qualified long-term care insurance.
Uninsured (out-of-pocket) medical, dental, and vision care expenses for eligible employee(s) and family.
Life, disability income, contact lens, hearing aid, Medicare Part A, Medicare Supplemental, optical/vision, and cancer insurance premiums for eligible employee(s).
Qualified Filing Statuses
While the above rulings specifically address family employment in a sole proprietorship, corporations and partnerships may also take advantage of a Section 105 Plan. Additionally, employers seeking to offer non-related employees a medical benefits package may also implement such a plan. Here is how a Section 105 Plan works within the various filing statuses.
Sole Proprietorships
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