Momentum - Business to Business Online Magazine MOMENTUM April 2020 | Page 24
TAXING MATTERS
T. MARK RUSH, CPA
Partner
Ham, Langston & Brezina, LLP
[email protected]
BLUEPRINT FOR EMPLOYEE-
Spouse 105-HRA (Health
Reimbursement Arrangement)
T
he 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. This name is
derived 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
Example. Using a properly designed 105-HRA,
Employer reimburses his employee-spouse $22,000
for medical expenses (health insurance, co-pays, other
medical costs not covered by insurance). Employer 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, Employer saves $10,626
in taxes this year and likely a similar amount every year
he is in business.
Why This Works for Employer
Employer 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 Employer’s medical expenses. To overcome this
impediment, Employer 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
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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).
Eligible Employees
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.