The Affordable Care Act (ACA) does not apply to a business that has only one employee.
This opens the door (likely regardless of what lawmakers do with the ACA) for what we are going to call the 105-HRA. We created this name from its two predecessors:
1. The Section 105 medical reimbursement plan
2. The health reimbursement arrangement
The 105-HRA gives you the best possible medical reimbursement plan—if you can qualify. The first requirement is to have one employee only. The second requirement is to operate the business as one of the following:
• Proprietorship reporting on Schedule C of IRS Form 1040
• Partnership filing IRS Form 1065
• Real estate rental business rising to the level of a business and reporting on Schedule E of Form 1040
• Farm business reporting on Schedule F of Form 1040
• C corporation filing IRS Form 1120
Before getting into the details of how you make this work for you if you are one of the taxpayers who fit this niche, let’s look at an example of how this can save money.
Example. Using a properly designed 105-HRA, Henry reimburses his employee-spouse $22,000 for medical expenses (health insurance, co-pays, other medical costs not covered by insurance). Henry is in the 25 percent federal tax bracket, the 15.3 percent self-employment tax bracket, and the 8 percent state tax bracket. With the 105-HRA, Henry saves $10,626 in taxes this year and likely a similar amount every year he is in business.
Why This Works for Henry
Henry operates his business as a proprietorship. Tax law does not consider proprietors to be employees for purposes of medical plans. This means there are no business deductions on the proprietorship tax return for Henry’s medical expenses. To overcome this impediment, Henry hires his spouse as his one and only employee.
The 105-HRA plan may reimburse the employee for expenses incurred for the medical care of
- the employee,
- the employee’s spouse (you),
- the employee’s dependents, and
- any child of the employee who, as of the end of the taxable year, has not attained age 27.
How the 105-HRA Works
Big picture. The Section 105 plan turns personal medical expenses into business deductions.
The plan, when designed for spouses, reimburses employee-spouses for family medical expenses, turning such reimbursements into business expenses deductible on the tax return as employee welfare benefits.
You cover your employee-spouse with family coverage, and that’s how you, the employer-spouse, get your coverage.
If you are single, don’t worry. You don’t have to get married to get the benefits of the Section 105 plan. Instead, you can create what amounts to a no-hassle solution by simply operating your business as a C corporation. The C corporation is a separate legal entity that can provide 105-HRA benefits when it has one eligible employee only (meaning that you are the only employee).
If you have eligible employees besides yourself and your spouse, you don’t qualify for the 105-HRA and should consider other plans such as the qualified small employer HRA (QSEHRA), a less-than-20-employee integrated HRA, a less-than-50-employee HRA, or the Section 125 plan (with or without a flexible spending plan).
For purposes of any Section 105 plan, your employees are far more numerous than you might think. First, you need to consider all your and your spouse’s businesses. All employees found in these businesses, including your spouse’s businesses, are deemed by Section 105 to be your employees. And remember, the ACA-exempt 105-HRA is a plan that works with one eligible employee only.
Would This Work for You
If you think you fit the profile for the 105-HRA, we can help you determine if this is true. And, if true, we can get help you get this tax-favored plan in place with
1. a 105 plan document (you need this in your tax file);
2. a proper medical reimbursement request form for the one-eligible employee to complete for reimbursement; and
3. an employee time sheet to prove work performed.
We specialize in helping clients clarify their taxes so they keep more of their money. Many small business owners who come to see us in Fort Worth, TX generally do not understand the tax law enough to explain it to a fifth grader.