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Medical Reimbursement - Section 105

Information

Section 105 of the Internal Revenue Code provides a way to save taxes, for both employer and employee. Donít 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.

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 Ė 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.

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last reviewed and/or updated on Monday, October 21, 2013 09:58 AM

 

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