Hans Kasper, MS-CPA, PS

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Section 105 - Owner Fringe Benefits
 

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Section 105 Medical Reimbursement Plans

Questions and Answers

Section 125 Medical Reimbursement Plans   Site Link

When I worked for the IRS, I saw very few businesses using IRS Section 105 to their benefit.  This section allows the business owners to deduct 100% of their medical expenses as a business expense.  Yes, there are some rules to follow, but the tax savings is well worth it.

During 2003, I am going to save myself $4,300 in income and social security taxes.  During the last ten years, I have been able to save myself between $25,000 and $30,000 in federal income taxes and social security taxes by deducting, as a business expense, 100% of my familyís medical insurance and personal medical expenses including dental, drugs, contacts, eyeglasses,  etc.  In addition, I have been able to save my clients an average of $2,450 per year in federal taxes-- some as much as $8,000.  Furthermore, what is most amazing about this little known tax benefit (most CPAís donít even know it exists) is that it is allowed by the IRS, it is totally legal, and it is even available to small businesses including single-owner LLCs, sole proprietors, partnerships, and C-corporations and S-Corporations.

Now I want to be very straightforward with you.  If that kind of money fell out of my pocket,  I would want to know where it went and how I could stop it in the future.  I know what you are asking yourself-- ďWhy didnít someone tell me about this before?  Just think about all the taxes I have overpaid into that bottomless tax pit called the federal deficit!Ē

ďI know-- something like this must cost a fortune.Ē  Well, it doesnít.  To be able save this kind of money takes only one hour of your time, and the cost is as little as $345 for the first year and $195 for each year thereafter. 

Letís think this through from an investment perspective.  It takes one hour to receive an average rate of return of 7.00 times your initial expenditure of $345 ($2,450 divided by $345) and for each year after that an average rate of return of 1250 times ($2,450 divided by $195). 

Can you earn that in the stock market?  Only if you get into very risky investments.

People often ask me if they have to change medical insurance plans or switch medical care providers.  The simple answer is NO!  This is not a medical plan; it is a tax benefit plan that allows you to take these expenses as a business expense deduction and, thereby, save a significant amount of federal taxes.

No, not everyone can save taxes with one of these plans.  Some small business ownerís facts and circumstances just donít fit the criteria to become eligible.  However, I find that 75% or more of small businesses can qualify and, thereby, save federal taxes.

Just yesterday, I was able to save a young couple, where the wife owned a sole proprietorship, approximately $800.00 in taxes, and another couple, who jointly owned a business that was a C-corporation, saved about $2,500.00.

Call my office now at 425-485-7853 to set up a Bizplan for your business and start savings taxes.

 


Section 105 Medical Reimbursement Plans

BizPlan (for small business owners) are Internal Revenue Code Section 105 Medical Reimbursement Plans available to business owners across the nation.  Sole proprietors, corporations, limited liability companies, and partnerships utilize the administrative services of BizPlan to save substantial tax dollars annually.  BizPlan services allow businesses to deduct 100 percent of their family health insurance premiums and out-of-pocket medical, vision, and dental expenses not covered by insurance.

To qualify for BizPlan, a business owner must be able to legitimately employ his or her spouse. (For "S" and "C" corporations, family employment is not necessary and are the only way for a single person to receive this benefit.  "S" corporations can only receive a partial income tax deduction and 100% of the S/S tax deduction.  "C" corporations receive 100% of both.)  The spouse becomes an employee in the business.  The business owner provides a reasonable wage for necessary business duties and files certain Internal Revenue Service forms.  BizPlan, developed in 1986, simplifies the accounting procedures and provides the administration and documentation required to maintain a proper Section 105 Medical Reimbursement Plan. That includes:

  • Plan Document - Updated to stay within IRS, DOL and ERISA guidelines.
  • Adoption Agreement - To set the guidelines of the employee benefit plan.
  • Required Summary Plan Description - Required under ERISA.
  • Annual Documentation of Benefits Paid - Must be made available for DOL inspection at any time.
  • Third Party Adjudication of Claims
  • Audit Guarantee - Covering the taxpayer.

Click this link to read a Tax Court case that defeated the IRS regarding Section 105 plans.

The average BizPlan participants save more than $2,450 annually in taxes. Over 50,000 participants are enrolled nationally in these plans.

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Questions and Answers

What is BIZPLAN?

BIZPLAN is a qualified plan under section 105 of the Internal Revenue Code which allows business owners the opportunity to provide to their employees (including the spouse of the business owner) tax free benefits.  These benefits are tax deductible to the business owner and non-taxable to the employee.  Typically section 105 is known as a medical reimbursement plan.  In other words, it is a tax plan which allows these benefits which are normally non-deductible to become tax deductible.  In addition, under a section 125 plan, day care costs are also a benefit.  Please, ask me about a section 125 plan if you are interested.  The Section 125 plan deducts the benefits pre-tax from payroll and a Section 105 plan reimburses the benefits tax-free in addition to payroll.

What are these benefits?

These benefits include: medical insurance, medical expenses not covered by the medical insurance, dental insurance, term life insurance, and disability insurance.

Are you saying to me that as a proprietor or a partner in a small business that if my spouse works for me as an employee, then these expenses can be tax deductible on my business as a benefit for him or her?

Thatís exactly right.  In fact, since you are related to your spouse and are a part of his or her family, then your medical insurance and medical expenses are a part of the benefit to your spouse.  Yes!  Normally, you can not deduct these expenses on your business return; however, with your spouse as your employee, you can now deduct it all.  S-corporations have special rules, please ask me about them.

What if I am single, can I still use BIZPLAN?

Yes, you can, but not as a sole proprietor.  You will have to incorporate your business as a C-corporation (100% deduction) or an  S-corporation (a less than 100% deduction) to gain this benefit.  It costs about $150 to incorporate a business in Washington if you do it yourself.  It is important to note that there are other tax issues to consider before incorporating as a C-corporation.  Please talk with me before you go ahead with this step.

Does BIZPLAN sell medical insurance?

No, BIZPLAN is not an insurance plan.  It is a tax plan that allows the medical insurance of your choice to become deductible on your business tax return.  Therefore, you are, as always, free to choose the medical insurance plan you wish and the doctors that you elect to serve you.

What will this plan save me in taxes?

Typically, you will save between 30% and 43% of the medical insurance and medical expenses in the form of income and social security taxes.  Usually, 15% in social security taxes and 15% or 28% in income taxes. 

Letís figure it out.  If your medical insurance is $4,800 per year and your additional medical and dental costs are $1,200 per year for a total of $6,000 per year, then you will save between $1,800 and $2,580 in taxes per year.  Now if that kind of money fell out of my pocket, I would want to know where it went.

Does that mean that my spouse must be my employee for this plan to work?

Yes it does, if you are a proprietorship or a partnership.  However, if you are a C-corporation or an S-corporation, you can receive this benefit without employing your spouse.  If your spouse does work for you, then the work must be legitimate.

If I already have employees, will I have to provide them this benefit too?

First, if you do not have employees, then you donít have to worry about this.

If you have full-time employees, then you may have to cover them depending on the facts and circumstances--in this case a section 125 plan would be better.  If you have part-time employees, then it is most likely that they can and will be excluded from the plan.

Does that mean that I will have to pay my spouse wages and maintain time records?

Yes it does.  The spouseís pay including benefits must be reasonable.  In other words, the total of the wages and benefits cannot exceed what you would pay another unrelated person with similar qualifications.  You see, the key to making these expenses deductible is that your spouse works for you.  To be able to prove that, time sheets, payroll checks, and an employment agreement need to be implemented.  This is your best protection in case of an IRS audit.

Remember, by paying your spouse, you are not reducing your profit.  You are simply shifting some of your profit to your spouse.  In reality, your tax savings will be increasing your real net profits.

Will I have to write a separate check to my spouse as a reimbursement for the medical insurance and medical expenses?

Yes, you will.  You should write it out of the business checking account and deposit it into your personal account.  Furthermore, each time a reimbursement is made a BIZPLAN form should be completed and the copies of the bills attached to it.  At the end of the year, BIZPLAN will ask you to mail a copy of these forms to them.  AND, you have to keep the receipts for the expenses.

As a sole proprietor, do I need a business checking account?

Yes, you will need a business checking account.  Your spouse must not deposit his or her payroll check back into the business checking account.  Rather, it should be deposited into your personal checking account.  This additional account is meant to protect you so the IRS can not say that your spouse is an owner of the business and that the separation between the business and personal is both legal and real.

If I enroll in the plan after the beginning of the calendar year, can I still deduct the medical insurance and expenses for the entire calendar year?

No, you may not.  You may only deduct those expenses after the date of adopting the plan.

Will I have to pay payroll taxes for my spouse?

Yes, you will.  These taxes will include social security only.  Excluded are labor and industries (workmenís compensation), state unemployment and federal unemployment, if youíre a proprietorship.

Hold it!  If Iím going to be paying payroll taxes on my spouse, wonít I lose the tax savings that I have gained?

No, you will not lose what you have gained!  Look at it this way.  If your spouseís total compensation including medical costs is $8,000 per year and of that amount $6,000 is for medical costs, then his or her gross pay will only be $2,000 per year.  Even though you will be paying social security tax on these wages, you are simply shifting that tax from yourself to your spouse as long as you are under the social security maximum wage cap. There is no Federal unemployment tax when employing your spouse in a sole-proprietorship.

What payroll tax returns will I have to file?

On a quarterly basis, you will have to file a form 941 (social security).  On an annual basis, you will have to file form 940 (federal unemployment), and the form W-2/3 wages statement.  These are easy forms to complete because they will be identical (same amounts) quarter after quarter and year after year.

Will I have to make payroll tax deposits?

Yes, you will.  If you have no other employees, for the form 941 (social security) you will have to make a monthly payroll tax deposit of your spouseís withheld social security taxes plus the portion your business will have to match.  If you do have other employees, simply include your spouseís social security taxes in with your normal deposit.

Annually, you will have to make an additional payroll tax deposit for form 940 (federal unemployment).

How do I sign up for these payroll taxes?

To start with the IRS, complete form SS4.  They will assign you an employer identification number (EIN#) and you will be on your way.  For the State of Washington, absolutely nothing needs to be done.

I heard that you have to file an annual employee benefits tax return with the IRS for BIZPLAN, is that true?

The form that you are thinking of is a form 5500.  This form is required for section 125 plans with more than 100 employees, BUT it is not necessary to file this form for a section 105 plans-- like BIZPLAN.  Therefore, do not worry about it.

What if my business lost money last year, can I still deduct these expenses?

Yes, you can.  However, you must make sure that your business is really a business and not a hobby which might allow the IRS to disallow the deduction of your entire loss.  If you have a genuine business and have incurred a loss, then you can deduct these expenses.

What if I only have a part-time business and work for someone else full-time, can I deduct these expenses?

Yes, you can.  Remember that the primary qualification is whether or not your spouse works for you.  However, again I must repeat that this must be a working business or a business that is being built up to a working business and not a casual, ďIíll work at it when I want toĒ, business.

What if I work for someone else full-time and they deduct from my paycheck my spouseís share of the medical insurance-- can I deduct that on my business?

Yes, you can.  However, the medical insurance deduction must not be covered by a section 125 plan by your spouseís employer.  In addition, you can also deduct your medical expenses.

What is the annual cost to belong to BIZPLAN?

For the first employee (your spouse), the annual cost is currently $195.  Each additional employee costs $50 per year.  These funds are paid to BIZPLAN.  BIZPLAN is the company that maintains the plan and qualifies it for IRS and Department of Labor standards.

What will my accountant charge me to set up BIZPLAN?

My standard charge is $150. This is a one time fee and does not include quarterly or annual payroll tax return preparation fees should you be in need of that service.

The above fee includes:

  • Preparation of the plan adoption agreement form.

  • Preparation of form SS4 for the IRS.

  • Time spent explaining the plan and getting you started.

How do I enroll in BIZPLAN? 

You can enroll in BIZPLAN by following the Bizplan Checklist instructions.

Will BIZPLAN send me any paperwork?

Yes, they will.  Once your adoption agreement is sent to BIZPLAN, they will forward to you a formal packet of papers which will include a confirmation of plan enrollment and reimbursement forms.  At the beginning of each calendar year, they will send you a confirmation of your plan and you may change your plan specifications at that time for the new year.

Call my office now at 425-485-7853 to set up a Bizplan for your business and start savings taxes.

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This page was last updated on 05/13/2010

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