Section 105 of the Internal Revenue Code may very well be one of the “best-kept secrets” for managing your company’s health care costs. The medical reimbursement plans allowed under Section 105 provide sole proprietors, partnerships, C corporations, and limited liability companies (LLCs) a full tax deduction for employee medical benefits. This includes premiums paid to fund employee/dependent health insurance and other non-insured medical expenses (e.g., dental and vision care). As a small business owner, finding the right combination of employee benefits and tax savings is important to your company’s cost management strategy.
Some of the best candidates for the Section 105 plan are self-employed business owners who have a spouse active in the business and a small number of employees. By offering the spouse an employee benefits package that includes a Section 105 plan, the business owner has the potential to fully deduct his or her own family’s health insurance premiums and non-insured medical, dental, and vision care expenses.
For example, a small business owner with $5,000 in annual employee health insurance premiums and $4,000 of out-of-pocket medical expenses could hypothetically save $3,177 through proper utilization of a Section 105 plan. These savings are calculated based on 100% deduction of health insurance premiums and out-of-pocket medical expenses and, in this case, tax rates of 15% federal income tax, 15.3% self-employment tax, and 5% state income tax. (Savings will change as taxable income, business filing status, and state requirements vary.)
Adhere to IRS Guidelines
When administering a Section 105 plan, it is important to clearly establish an employer-employee relationship between the business owner and his or her spouse. Spousal employment must be fully documented, including a record of regular and fair wages, W-4, W-2, I-9, and any other employee tax reporting forms as required by the Internal Revenue Service (IRS).
If you are thinking about establishing a medical reimbursement plan for your company, you should review the costs versus the benefits. When setting up the plan, you can use certain factors to determine employee eligibility for the Section 105 plan, including age, years of service, and hours worked per week. However, once a Section 105 plan is established, all participants must receive equal treatment. Thus, owners of larger companies may not find Section 105 plans beneficial.
Using creative benefit and tax planning strategies, such as a Section 105 plan, may not only boost the profitability of your company, but also make medical expenses less costly to you and your family. For more information on whether a Section 105 plan can benefit your business, contact a qualified tax professional.