Tax Savings from Medical Expense Reimbursement Plans

New Restrictions on Employer Medical Reimbursement Plans

Section 105 of the Internal Revenue Code provides a way to save taxes, for both employer and employee. Don’t confuse this 105 Medical Reimbursement Plan with a Section 125 Cafeteria Plan, as they are two different programs. Section 105, a little known part of the tax code, allows a 100 percent deduction for health insurance and even allows companies to write off other non-insured medical, dental and vision expenses as well. Employers and employees can save Federal Taxes, State Taxes, FICA, Medicare, Workers Compensation , Unemployment and State Disability Insurance payroll taxes. Up to a 50% savings for some. While any company can take advantage of the plan, smaller companies, particularly self-employed individuals that can employ their spouse in their business, can benefit greatly.

Health Reimbursement Plans Not Compliant With ACA Could Mean Exorbitant Penalties

To qualify, a business owner must file their taxes as a Sole Proprietor, Partnership, C Corporation, S Corporation or a Limited Liability Company. Except in the case of a Corporation, the business owner must be married and the spouse must be active in the business – even on a part-time basis.

Like many deductions allowed under the law, Section 105 plans require strict compliance measures set up by the Department of Labor and the Employee Retirement Income Security Act, known as ERISA. You have to have a plan document, a summary plan description, establish employment relationship(s) - and a few minor documents. And, you have to file the appropriate forms with your business tax returns and keep careful payroll records. The program will require about 3 hours of paperwork each year per participant, but the time invested will be well worth the tax savings. Thousands of tax dollars that people would ordinarily pay can be saved by adopting a plan.

The cost of establishing and operating a plan will vary. One of the best values in the marketplace will cost around $200 to set up and $50 per employee per year to administer. It is very inexpensive and very cost effective.

Medical Expenses - Section 105

Based on Section 105 of the Internal Revenue Code, a self-employed individual who employs a spouse in the business can become eligible for a medical reimbursement package.
A medical reimbursement plan enables qualified small business owners to deduct 100% of federal, state, and FICA taxes for family medical costs.  Key to these savings is the ability to declare medical expenses as a business expense rather than a personal deduction.  Qualifying medical expenses include:

• All family health insurance premiums including dental and vision (post-tax)


• Qualified long-term care insurance premiums


• All out-of-pocket medical, dental and vision care expenses, including over-the counter expenses


• Cancer insurance premiums


• Term life ($50,000 max) and disability income insurance premiums for employees only

The plan must cover all eligible employees, however, you can exclude employees who-

1. are under the age of 25
2. work less than 35 hours a week
3. are seasonal or work less than 9 months a year
4. have less than 3 years of service

A sole proprietor (Schedule C) is not an employee, but an owner, so he or she must be able to employ their spouse or family member to access these benefits.

Example: A self-employed individual earns $100,000 from his or her business and spends $8,000 out of pocket for medical expenses. Medical expenses can be itemized on Schedule A for the business owner, but only expenses that exceed 7.5% of his or her adjusted gross income would be deductible, so this would eliminate the deduction for $7,500 of medical expenses. With a Medical Expense Reimbursement Plan, the entire $8,000 would be deductible.

Post Updated May 4, 2015