Section 105 Plans
Questions and Answers
is a Section 105 plan?
A Section 105 Plan is under Internal Revenue Code, Section 105
for employers to reimburse employees for medical expenses
(including health insurance premiums) not reimbursed or paid for
by insurance. If the employer complies with the 105
requirements, the reimbursement amounts are fully deductible to
the employer and not included in the employee`s gross income.
the excitement over the Section 105 plans?
A Section. 105 plan can put Sole Proprietors and Partners on
equal footing with shareholders of Subchapter C Corporations.
The spouse of the sole proprietor or partner needs to be
employed in the business. The reimbursements would be paid to
the spouse, rather than to the Sole Proprietor or Partner. They
cover medical expenses incurred by the Sole Proprietor or
Partner and /or any family member.
the 105 plan, what tax deductions does a Sole Proprietor or
Without the plan, Sole Proprietors or Partners could deduct, at
most, only 45% of their current health insurance premiums
incurred in 1998. This percentage could change for later years.
Please check with your tax preparer. If you itemize deductions
and your medical expense is more than 7.5% of your adjusted
gross income the deduction is the excess amount over 7.5% of
Adjusted Gross Income. Example: Adjusted Gross Income $40,000 x
7.5% = $3,000. Expenses must exceed $3,000 to receive a
deduction. (With the 105 you have 1st dollar deduction.)
business / companies can have a plan?
The following types of businesses are eligible:
Subchapter S Corporations (but only for employees who own 2%
or less of the Corporation. Subchapter S can sponsor a plan for
other employees but the owner and spouse or family members may
LLC`s and LLP`s
are my responsibilities?
For sole proprietors and partnerships, your spouse must be
employed by you and perform duties which are essential to the
operation of your business. This can be on a full time or part
time basis, even if they are employed elsewhere. If there are
other employees, they must be offered the plan.
Pay your spouse/employee. The compensation package must
be reasonable for the duties performed and can include wages,
benefits or a combination of both.
Documentation. Your spouse/employees must keep a record
of dates and times work was performed, the amounts for medical
expenses incurred and what they were.
Please note: If a spouse is an employee, only Federal,
State and FICA taxes are due, not FUTA (Federal Unemployment)
presently not SUTA (State Unemployment.) See your tax preparer.
single or divorced sole proprietors or partners with no
employees qualify for this plan?
a husband and wife have separate health policies can both be
Yes. The plan is a Medical Expense Reimbursement Plan (MERP).
You can reimburse the employee for the premiums paid for the
the spouse works for another employer where insurance coverage
is provided but not dependent coverage, what part if any
Dependent coverage can be reimbursed through this plan plus any
uninsured medical expenses.
the spouse works for another employer who pays a percentage of
the total employee and dependant coverage what if any of the
This is a Medical Expense Reimbursement Plan. Any portion of the
premium that is not paid by the spouse`s other employer may be
reimbursed and qualify as an expense.
nursing home premiums qualify for deductions?
Possibly, but confirm by calling GBS࣬aim office.
non-reimbursed nursing home expenses qualify for this plan?
Only if the confinement was medically necessary. (If a husband
and wife are involved, the employee/spouse can be reimbursed for
Medicare supplements qualify?
Yes. (If a husband and wife are involved, the employee/spouse
can be reimbursed for the expense.)
expenses not covered by Major Medical, Hospital, Dental, Cancer
Insurance, Accident, Medicare or Insurance policies qualify for
Yes. Any medical expenses allowed by IRS code section 213 on
your individual income tax return can qualify for this plan.
other employees be included other than the spouse of the
Yes. However, there are certain requirements that must be met.
all employees be included in the plan?
No. There are basically two classes of employees that can be
1. All full time employees.
2. All full time and part time employees
but it all depends on what is selected in your Adoption
Agreement. Please confirm by calling GBS compliance department.
do I differentiate between full time and part time employees?
Any employee less than 40 hours could be considered part time.
you cover only full time employees and exclude part time
do you establish the employer/employee relationship?
First employ your spouse at a fair and reasonable wage and
provide a job description for the work performed.
is considered a fair and reasonable wage?
Whatever you would pay someone else to do the same work.
However, due consideration should be given to the spouse for
knowledge of the job performed.