Discussion:Section 105 tax treatment

The HRA or 105 is for a sole proprietor and let's assume a properly executed 105 plan (it is actually from NASE) along with a properly executed employment agreement. The husband owns the business in his name and employs the wife at $100 per month for 28 hours worked (excluding health plan and reimbursemnts). Therfore the husband and their child are covered under the 105 plan.

DEDUCTIONS:

Employer paid premiums: form 1040 line 29 (limted to self-employment income - self-employment tax deduction - IRA contribution).

Employer reimbursed non-covered expenses under section 105: Schedule C line 14

REPORTING:

The employee's W-2 would only show the wages earned. No further reporting requirements on the W-2 or W-3

TAXES:

The employee owes no taxes on either the premiums paid or the reimbursements

The information on this is very sparse and what information that is out there seems split between sole proprietors and S corps...which appear to be a little different.

As always, thanks to all. This is the last of my client's issues that I am hashing through.

Thanks, Michael

My main concern is the reporting because I have found a littany of contradictory information as to whether the value of the premiums and reimbursements should be included in income on the employee's W2 as income.

Here is what Publication 969 says: Contributions to an HRA

HRAs are funded solely through employer contributions and may not be funded through employee salary deferrals under a cafeteria plan. These contributions are not included in the employee's income. You do not pay federal income taxes or employment taxes on amounts your employer contributes to the HRA.

But my UNDERSTANDING--which can be flawed--then has stipulations regarding S corps vs sole proprietorships. For instance, this link: http://www.coredocuments.com/irsheadliner163.php If you check out the chart, it shows that the employer deducts contributions as W-2 income and includes them in box1 of the W2.

Michael

How many employees? Are they all covered by the Sec 105 plan?

A Section 105 is not limited to S Corp or Sole Proprietors.

Right, I was just focusing on the Sole and S corp for my purposes.

The business is in the name of the owner (husband) and the wife is employed. Normally--per my understanding--the husband, absent the wife, would otherwise be unable to use a 105. Since the wife is employed by the company, then the husband and their child would be covered.

My understanding is that for the purpose of deducting the premiums, the 105 isn't distinguished from any other form of health plan and is deducted above the line on the 1040 line 29 (subject to the limitations).

My understanding is that reimbursed medical/dental/vision expenses are deducted on schedule C line 14.

Michael

(Also Section 162; 1.162-10.)

  Amounts reimbursed under an accident and health plan covering all bona fide employees, including the owner's wife, and their families are not includible in the employee's gross income and are deductible by the owner as business expenses. 
 
 

REV. RUL. 71-588

  The taxpayer operated a business as a sole proprietorship with several bona fide full-time employees including his wife. The taxpayer had an accident and health plan covering all employees and their families. During 1970 two employees, including the wife, incurred expenses for medical care for themselves, their spouses, and their children, and were reimbursed pursuant to the plan. The reimbursed amounts qualified both as amounts received under an accident or health plan for employees within the meaning of section 105(e) of the Internal Revenue Code of 1954 and as amounts described in section 105(b) of the Code. 
 
  Held, the reimbursed amounts received by the employees are not includible in their gross income pursuant to section 105(b) of the Code and these amounts are deductible by the taxpayer as a business expense under section 162(a) of the Code.

....and this client is done!

Michael

That's an issue for me as well. The salary amount and the information is coming from NASE and I am having a heckova time getting any information on their plan. My fear is that the NASE is selling members what appears to be a good plan but turns out to be a 'Snipes' sort of arrangement that gets my client hose up.

I believe that by the time we add in the cost of premiums, salary, and reimbursed benefits, we will be over $10 an hour or so. She only works about 28-30 hours a week in the business so I think we will be okay there.

Michael

"Contrary to petitioners’ contentions, section 105(b) addresses a situation where certain amounts described in section 105(a)15 are paid, directly or indirectly, to a taxpayer to reimburse the taxpayer for the expenses that such taxpayer incurred for the medical care of such taxpayer, such taxpayer’s spouse, and such taxpayer’s dependents."

This to me sounds like splitting hairs, or a victory for form over substance, but do read this recent case.

The taxpayer had no receipts for the expenses paid. The wife had an outside job providing her with medical insurance. The taxpayer had so many problems that the payment issue was not one of them. I had a revenue agent cite a case clearly in the IRS favor about an issue. Upon on reading the case you could tell the Judge just got P. O. and threw the book at the taxpayer. I think this is the case here.

A 105 is completely and separate from an insurance policy. You can have a 105 without even having an insurance policy if the employer wants to reimburse just expenses.

You can self administer but run the risk of incorrectly allowing/disallowing expenses.

You can hire a company such as NASE or other to administer the plan for you but at a cost per year.

Sound correct?

Thanks,

Michael

There should be no problem with the expenses if you document them as medical. Also, one of the expenses that can be reimbursement is a medical insurance policy, or, in additional to covered expenses you can provide a medical insurance policy such as, a group plan, within the Sec 105 plan. The medical expenses not paid by the insurance policy would become expenses that the plan pays. I would use a Sec 105 plan to covered items not covered by any medical insurance. Such as eyeglasses.

I wonder, however, about the hourly rate the wife is making. When it comes to federal minimum wage rules, they do not say you can include the cost of benefits to arrive at the minimum, at least not that I am aware of. I think I would recommend the wife's salary be increased to a reasonable level.

And take a look at the wages paid Mrs. Frahm in http://www.ustaxcourt.gov/InOpHistoric/frahm.TCM.WPD.pdf Wages? Was more like W.A.M.

My opinion don't mean to step on anyone's toes.

The preprinted forms from the Frahm case are not worth much and have obvious errors for use by Frahm.

Is a wife working for her husband subject to wage and hour, or minimum wage reuirements?

The federal law is not the only concern I would have. Is there a state law that might apply? What about the health insurance company itself? If they found out the spouse is being paid a pittance just in order to get the insurance, would they take issue with that? What about the IRS perspective? If this is set up just to get more deductions, would the IRS disallow it?

But I agree with Roy that there is little need to pay someone else for what a knowledgable person, with help from his professional, can do.

provides that the minimum wage provisions of the Act shall not apply with respect to any employee employed in agriculture if any of the following provisions apply: 􀁸 such employee is employed by an employer who did not, during any calendar quarter during the preceding calendar year, use more than five hundred man-days of agricultural labor; 􀁸 such employee is the parent, spouse, child or other member of his employer’s immediate family;Specifically, 29 U.S.C. § 213(a)(6) [United States Code, Title 29, Section 213(a)(b)] provides that the minimum wage provisions of the Act shall not apply with respect to any employee employed in agriculture if any of the following provisions apply:

Michael

Specifically, 29 U.S.C. § 213(a)(6) [United States Code, Title 29, Section 213(a)(b)] provides that the minimum wage provisions of the Act shall not apply with respect to any employee employed in agriculture if any of the following provisions apply:

- such employee is employed by an employer who did not, during any calendar quarter during the preceding calendar year, use more than five hundred man-days of agricultural labor;

- such employee is the parent, spouse, child or other member of his employer’s immediate family;

- such employee (i) is employed as a hand harvest laborer and is paid on a piece rate basis in an operation which has been, and is customarily and generally recognized as having been, paid on a piece rate basis in the region of employment, (ii) commutes daily from his permanent residence to the farm on which he is so employed, and (iii) has been employed in agriculture less than thirteen weeks during the preceding calendar year;

So I suppose the $3.57 per hour plus the benefits might stand.

Michael

H is a Sch C Sole Prop. Has 2 employees 1 is his wife (both are paid above minimum wages receive w-2 etc. etc.) All legit no games; real pay real work. He pays 12K for Health insurance deducts wife and employee's off line 14 sch. c. He deductis his portion on 1040 page one line 29. His portion is 2500. Now if he sets up a 105 plan, he can then deduct the entire 12K from line 14 plus and additional out of pocket expenses glasses dental etc he reimburses his wife and employee (ee is nephew so he doesn't mind). Therefore, he will automatically save the SE tax on his insurance plus be able to deduct all other out of pocket items like glasses; dental; chiropractor etc. Thanks. I.M. Slo

Back to the research!

Michael

Michael

If I am self-administering the 105 as an employer, I would be required to actually set aside money in an account separate from the business checking account. I couldn't just state an allowance and pay it from the general business checking.

If I am paying someone to administer a plan for me, I would transfer my monthly or yearly allottment to the administrator who keeps track of the employee balances and pays the reimbursements.

Is that how it works?

Thanks,

Michael

The reason I asked is that while trying to find a good summary of the plan, I tripped across one where the administrator required the employee to submit the claims to the administrator (Blue Cross) who actually paid the claim.

I think with a micro employer such as I am working with, it would be advisable to have them segregate it as they might otherwise spend it.

Thanks,

Michael

Michael

The HRA or 105 plan is separate from the health insurance. I get that. However, most of the sites that sell or tout the 105 tell the employer (in a sole prop where the spouse is hired by the owner) to change the insurance plan over to the spouse's name.

If the business properly establishes the 105 with the spouse as an employee recipient, why then would the policy need to be in the spouse's name?

I am confused on this last point. It seems to me that the qualification for reimbursement for the owner and their child would come from the spouse being eligible under the 105 plan, not from the insurance policy. Can someone clear this up?

I think when I get this all figured out, I am going to create a website spelling all of this out. Getting clear, concise, consolidated and AUTHORITATIVE information on this is difficult!

Michael

The reimbursements are for qualified medical expenses not covered by insurance if also included in the plan. You are correct in your analysis of this point.

(B) Exclusion of certain employees

         For purposes of subparagraph (A), there may be excluded from
       consideration -
           (i) employees who have not completed 3 years of service;
           (ii) employees who have not attained age 25;
           (iii) part-time or seasonal employees;
           (iv) employees not included in the plan who are included in
         a unit of employees covered by an agreement between employee
         representatives and one or more employers which the Secretary
         finds to be a collective bargaining agreement, if accident
         and health benefits were the subject of good faith bargaining
         between such employee representatives and such employer or
         employers; and
           (v) employees who are nonresident aliens and who receive no
         earned income (within the meaning of section 911(d)(2)) from
         the employer which constitutes income from sources within the
         United States (within the meaning of section 861(a)(3)).
     (4) Nondiscriminatory benefits
       A self-insured medical reimbursement plan does not meet the
     requirements of subparagraph (B) of paragraph (2) unless all
     benefits provided for participants who are highly compensated
     individuals are provided for all other participants.

Am a sole proprietorship that wants to hire my wife only for the benefits noted above. Our current insurance plan, as with most self employed has a high deductible. Have read about HRAs , HSAs, and Section 105s until I'm fully confused. Which are better in your opinions, Section 105s? Where are sample forms available online that can be used as a template for putting together a plan?

Here is my additional question to this - Husband is self-employed, hires wife as legit employee, who also is the only employee of the business. Owner/husband has taken out the policy in the business name to get a "group" policy - better rates. So, can husband still deduct ALL of the premiums on the schedule C? (assuming section 105 in place)? I thought the hicup in this scenario is the policy should be in the wifes name, with her "dependents" listed (which includes husband). I find sole proprietor's many times get a "business group" medical policy, rather than some individual single policy, because the rates are so much better (you normally have to have 2 employees and the owner is considered one of those).

Anyone else?

That takes precedent (at least in the Service thinking) over Section 105.......