Section 105 Plans
Tax Saving Strategies for Health Related Expenses
A HRA or Health Reimbursement Arrangement is a Section 105 plan that allows employers and the self employed to set aside a specific amount of money annually for employees to use to pay for eligible health care medical expenses as defined by the plan.
The Section 105 of the Internal Revenue Code has been around since 1954. Section 105 plans were used primarily by farmers to provide tax reductions to their family members employed on the farm. Originally, the 80/20 indemnity plans were used to provide the insurance in those Section 105 plans. Today those same Section 105 plans provide valuable tax relief to the small business owner.
Anyone can be eligible for a section 105 plan if they work for an employer who has a plan in place. An employee would need to qualify by the employer’s requirements to be eligible. Companies that have one employee, one thousand employees or any size are all eligible for Section 105 plans.
Section 105 plans are designed specifically for small business owners that can legitimately hire their spouse such as farmers, over-the-road truckers, real estate agents, insurance agents, etc. Because the spouse/employee can be reimbursed for family medical expenses, the employer benefits as well.
- Savings - By adjusting health insurance coverage, implementation of a Section 105 plan can generate a savings in overall health benefits for the employer and employee.
- Better consumers - One key solution to the rising costs of health care is to put more choices in the hands of the consumers. By doing this, employees search for the most effective and cost efficient care.
- Improved employee morale - The employer’s expenditures for health care are visible and clear to employees.
- Recruit and retain quality employees - Current and prospective employees view an employer in a positive light because a benefit package is being provided with the employee’s interest in mind.
An employer gets to set the requirements of a Section 105 plan. Probationary periods, hours worked per week, years of service worked and age requirements are all options for the employer to set as requirements of a Section 105 plan.
- TASC pioneered the use of Section 105 plans, allowing family-owned businesses to deduct family health insurance premiums and other out-of-pocket medical expenses. TASC provides a long-term, value-oriented approach to your Section 105 plan. However it’s measured - dollars and cents or reduction of late-night headaches and worries - TASC provides consummate value to our clients and providers.
- A true commitment to low overhead with a no-nonsense approach helps keep our fees low and makes our service affordable.
- TASC offers well seasoned financial professionals with years of experience. We offer an unparalleled level of customer service. We stand behind our services and make sure everything is exactly right.
- An endorsement of technology. From on-line communications to faster processing to the Benefits Debit MasterCard, we recognize the importance of technology in making many aspects of business more efficient. We continue to use these methods as a way to save time, save money, improve processes and generally make things easier.
- A promise. As we head into the future, you can count on our growth and innovation to raise the level of our services in every regard. Our goal remains to continually increase customer satisfaction.
- Audit guarantee.
- Savings guarantee of $500 or your money back!
The main difference between a Health Savings Account (HSA) and a Health Reimbursement Arrangement (HRA) is that a HRA the employer has control over the plan and the funds that are contributed to the plan. Employees own the HSA funds but an employer owns the HRA funds. With the HRA, an employer could allow carryover of funds from year to year too. HRA plans also save FICA or Self Employment taxes which is an extra 15.3%
The difference between a Section 125 plan and a Section 105 plan is that the Section 125 plan can be employee and employer funded. The Section 105 plan can only be employer funded. The Section 105 plan would be put into place if the employer wanted to offer a benefit provided by the employer. A Section 125 plan is something that can be set up for employees to use their own funding.
All funds are tax deductible for employers. All funds are tax-free for employees. The average Section 105 plan participant through TASC saves an average $2450 annually in taxes. Over 50,000 participants are enrolled nationally in these plans.
In large Section 105 plans for large employers, when an employee has a medical expense, they would simply submit the expense to the Section 105 plan administrator and then would receive their tax-free dollars in the mail from the administrator. Once the employer sets up the plan, the dollars are eligible to the employee at anytime in the plan year.
In smaller Section 105 plans for small business owners, the employee (which in this case generally is the spouse) gets reimbursed from the owner/spouse. Where the business owner cannot participate in a Section 105 HRA plan, the spouse can and that has been the appeal of Section 105 plans as defined by the Internal Revenue Service. Again, because the spouse/employee can be reimbursed for family medical expenses, the owner/employer benefits as well.
I am self-employed and I’m already deducting my insurance premiums. Why do I need a Section 105 plan?
As of 2003 to present, 100% of health insurance premiums became tax deductible for the self-employed. The self-employed can take the deduction whether they itemize or not. However, most tax payers are unaware that the 100% health insurance deduction only affects income tax and does not reduce income when calculating Social Security taxes. The 15.3% Self-Employment tax is still paid on insurance premiums. If an employer elects to establish a Section 105 plan for a spouse/employee, the Social Security taxes are eliminated for the employee as well as the employer. The beauty and the benefit of Section 105 plans, permits employers to take the additional 15.3% deduction!
Medical expenses are deductible if the self-employed itemize deductions; however, they are only able to write off deductions in excess of 7.5% of the Adjusted Gross Income. Two examples:
If Adjusted Gross Income is $50,000 and you have $5,000 in out-of-pocket medical expenses, you can only deduct $1,250 ($50,000 X .075 = $3,750 and $5,000 - $3,750 = $1,250).
If Adjusted Gross Income is $40,000 and you have $3,000 in out-of-pocket medical expenses, you can deduct $0 ($40,000 X .075 = $3,000 and $3,000 - $3,000 = $0)!!
With a Section 105 plan, the employer can deduct the entire $5,000 or $3,000 as a business expense.
AgriPlan/BizPlan cost $195 per year. Additional employees can be added to Plan for $50.