Providing Health Insurance Nationwide

Section 105 Program

Through a Section 105 program permits certain business to deduct 100% of their health insurance premiums and out of pocket medical expenses. These eligible expenses include, but are not limited to, co-pays, eye exams and even gas mileage to and from the doctor’s office can be written off. You can even deduct up to $50,000 in term life insurance for an insured employee.

Although Section 105 plans may be used by a wide variety of unincorporated businesses, they are extremely tax efficient for the self-employed. This is a segment of the population where the tax code has not held parity with the "incorporated world." This group traditionally has had difficulty finding affordable health insurance if and when they can find it.

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While corporations are able to deduct 100%, the self-employed were only able to deduct 40%! After 2001, you will be able to deduct even a larger percentage of your health insurance premiums. In tax year 2002, the deduction will be 70% of your premiums. In tax years 2003 and later, you will be able to deduct 100% of the premiums as an adjustment to your total income. For other persons, a medical expense deduction is allowed for premiums paid for medical care insurance subject to the 7.5% limitation. In order to utilize the deduction, you must be able to itemize deductions.

If you are self-employed and can’t wait till 2003 and would like to have a 100% deduction for many eligible expenses not covered by health insurance, read on.

It is a great provision for the small business owner who can use it but how many people can take the time to figure this out when you are running full tilt operating a business and a family. The self-employed should have full deductibility for health related expenses and be treated the same as other business entities.

Unlike the standard 50% deduction for the year 2001, which can be taken only on federal taxes, a Section 105 program allows full deductions from federal as well as state taxes.

In 1954, Section 105 plans began as a way for farmers to buy health insurance. Today they have evolved into a roundabout way for the small business owner to buy health insurance that they might not purchase and alleviate some taxes along the way.

How do Section 105 Programs work?

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This concept is made possible through Internal Revenue Case Sections 105, 106, 162 and Revenue Ruling 71-588. Revenue Ruling 71-588 held that reimbursed amounts received by employees are not includable in their gross income pursuant to Section 105(b) of the Code and these amounts are deductible by a sole-proprietor as a business expense under Section 162(a) of the Code. All parties are advised to consult their individual tax advisors to ensure proper treatment.

Thanks to Revenue Ruling 71-588, you can now hire your spouse to help in your business and pay them wages that will cover "Medical Expenses". Because your spouse’s total income will be used to cover these expenses, there would be no payroll taxes due as your employee and you can write off the entire wages as a business expense. If you pay your spouse more than the actual reimbursable expenses, payroll taxes may be required.

"Self-employeds can take 100% of health costs as a business expense instead of 40% by employing their spouses and providing family coverage for employees. That way, the self-employeds' medical expenses are covered by the company plan...a large tax saver for one-person proprietorships. IRS says such arrangements are allowed under section 105 of the tax code." Kiplinger Washington Letter, June 28,1996

The owner must have a spouse who is a "bona fide employee," which is generally understood to mean working 15 hours a week for the business. If you think about it for a minute, how many of you have a spouse that does the books, stuff envelopes, or helps out anyway they can to ensure the success of the business and the family? In other words, providing a legitimate function for the business. If that is indeed the case you should keep records of the time spent working.

The spouse-employee then finds health insurance that is paid for by the owner of the business. The policy naturally covers the spouse-employee’s family and the business owner is covered as a dependant.

At tax time, the self-employed person can then deduct the full cost of the policy, plus any non-insured medical expenses (the latter are listed as a separate category in the plan) as a business expense. The tax write-off is taken on schedule C.

There is one downside though, If health insurance is offered to the spouse-employee, it must also be offered to other employees, if there are any. But, the other employee(s) don’t have to take it either. For instance, they may already be covered by their spouse’s health insurance plan.

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There you have it. A legal of way having your health care for you and your family and a way to save on your taxes and increase your cash flow. Have fun and may your business be successful.

http://www4.law.cornell.edu/uscode/26/105.html

These pages are designed to provide accurate information in regard to the subject matter covered. It is furnished with the understanding that the publisher is not engaged in rendering legal or accounting advice. If legal advice or expert services are required, please contact your attorney or accounting professional.