Section 105 Plans

Questions and Answers

  1. What 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.
  2. Why 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.
  3. Without the 105 plan, what tax deductions does a Sole Proprietor or Partner allow?

    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.)
  4. What business / companies can have a plan?

    The following types of businesses are eligible:

    Sole Proprietorships
    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 not participate.)
    Subchapter C-Corporations
    LLC`s and LLP`s
  5. What 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.
  6. Can single or divorced sole proprietors or partners with no employees qualify for this plan?

  7. If a husband and wife have separate health policies can both be deducted?

    Yes. The plan is a Medical Expense Reimbursement Plan (MERP). You can reimburse the employee for the premiums paid for the spouse.
  8. If the spouse works for another employer where insurance coverage is provided but not dependent coverage, what part if any qualifies?

    Dependent coverage can be reimbursed through this plan plus any uninsured medical expenses.
  9. If the spouse works for another employer who pays a percentage of the total employee and dependant coverage what if any of the premiums qualifies?

    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.
  10. Can nursing home premiums qualify for deductions?

    Possibly, but confirm by calling GBS࣬aim office.
  11. Can 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 the expense.)
  12. Can Medicare supplements qualify?

    Yes. (If a husband and wife are involved, the employee/spouse can be reimbursed for the expense.)
  13. Can expenses not covered by Major Medical, Hospital, Dental, Cancer Insurance, Accident, Medicare or Insurance policies qualify for deductions?

    Yes. Any medical expenses allowed by IRS code section 213 on your individual income tax return can qualify for this plan.
  14. Can other employees be included other than the spouse of the employer?

    Yes. However, there are certain requirements that must be met.
  15. Must all employees be included in the plan?

    No. There are basically two classes of employees that can be covered.

    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.
  16. How do I differentiate between full time and part time employees?

    Any employee less than 40 hours could be considered part time.
  17. Can you cover only full time employees and exclude part time employees?

  18. How 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.
  19. What 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.




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