Section 105 Plan

Section 105 Plan

Section 105 Plan
How can you “hire” a spouse in a sole proprietorship without having to pay a wage, and where do you report it?

A Section 105 plan allows the employee-spouse to be given tax-free reimbursement checks to pay for substantiated heal costs incurred for the employee-spouse, their spouse, who just happens to be the business owner who is your client, and their dependent children.  In other words, the client’s whole family is covered!

KEY POINT: The IRS admits this strategy works.  For proof , see Rev. Rul. 71-588, TAM 9409006, and IRS Industry Specialized Program Settlement Guideline for Health Insurance Deductibility for Self-Employed Individuals (UIL No. 162.35-02, dated January 25, 2001).  The Tax Court also agrees it works even when all of the employee-spouse’s compensation is in the form of Section 105 plan reimbursements.  [See Speltz, Peter F. and Maureen, TC Summary Opinion 2006-25 (2006).]

A written Section 105 plan document is required.  In order for Section 105 plan reimbursements paid to the employee-spouse to be a deductible compensation expense for the client’s business, the reimbursements, when combined with any other salary or benefits paid to the employee-spouse, must be reasonable in relation to the work actually performed by the employee-spouse [IRS Sec. 162(a)(1)].  Amounts reimbursed under the plan are simply reported as “employee benefits” on the tax return.

WARNING: If the client’s business has other employees, the Section 105 plan must be offered on a nondiscriminatory basis to them as well. Read the captioned information carefully before recommending this option to your clients.

Learn more about tax benefits like the105 plan. Become a Certified Tax Coach.

The AICTC provides our members with important tools such as written plan documents and other support.  Read more about member benefits.

Share This Post

More To Explore

Get Certified in Tax Planning

Becoming a Certified Tax Coach™ can dramatically increase your income and reignite your passion for your work at the same time! Certified Tax Coaches learn