Blueprint for Employee-Spouse 105-HRA (Health Reimbursement Arrangement)
I’m excited to introduce you to a valuable strategy that could significantly reduce your taxable income by converting personal medical expenses into business deductions. This approach, known as the 105-Health Reimbursement Arrangement (105-HRA), is particularly advantageous for businesses with a single employee—often, the business owner’s spouse.
Overview of 105-HRA
If you qualify, the 105-HRA gives you the best possible medical reimbursement plan. The first requirement is to have one employee only.
The second requirement is to operate the business as one of the following:
Proprietorship (Schedule C)
Partnership (Form 1065)
Real estate rental (Schedule E)
Farm business (Schedule F)
C corporation (Form 1120)
How It Works
By employing your spouse as your sole employee and implementing a 105-HRA, you can reimburse all medical expenses, including health insurance premiums and out-of-pocket medical costs. The reimbursements become tax-deductible business expenses, potentially saving thousands of dollars annually.
For example, a properly designed 105-HRA enabled one business owner to save over $10,000 in taxes by reimbursing his employee-spouse $22,000 for medical expenses.
Key Requirements and Benefits
Single employee. To qualify, your business must have only one employee. (If you operate as a C corporation and are the only employee, your C corporation qualifies.)
Tax deductions. Reimbursements through the 105-HRA are deductible as business expenses that reduce self-employment, federal, and state income taxes.
Employee documentation. Documenting your spouse’s employment status is crucial. Make sure to have your spouse submit time sheets to help show work completed.
Reimbursement process. Ensure that medical expenses are paid from a personal account and reimbursed by the business from its business account in a well-documented manner.
Conclusion
The 105-HRA presents a compelling opportunity for business owners with a single employee to convert personal medical expenses into deductible business expenses. But to maximize benefits and avoid IRS trouble, careful planning and compliance are essential.