Top Benefits of Section 105 Plans

Top Benefits of Section 105 Plans

        Section 105 plans can be highly beneficial to both employers and employees. They can allow a qualified employer to reimburse employees or pay directly for medical insurance premiums free of federal, state or FICA taxes. Let’s explore some of their best benefits below.

1. Reduction of costs. Enacting a Section 105 plan can reduce the amount paid for medical expenses for both the employer and employee. These benefits depend upon the legal structure of the business, but are generally applied as follows:

1. Sole proprietorships – If the owner of a sole proprietorship legitimately employs a spouse or dependent, they can enact a Section 105 plan and deduct the cost of medical, dental, vision and long-term care premiums directly as a business expense. The cost of these expenses will not be subject to federal or state taxation. They also reduce the taxable income of the sole proprietorship. However, if the owner of the sole proprietorship is not married and cannot employ another family member, they can still use a plan but costs of premiums will be subject to federal and state taxes.
2. Partnership – Similar to the sole proprietorship, the partner must legitimately employ a spouse or dependent to realize the tax-free benefits of the Section 105 plan. If the partner is not able to employee a spouse or family member, they may still participate in a Section 105 plan but premiums or expenses paid will be subject to full federal and state taxation.
3. S-Corporation – Owners of an S-Corporation with a business ownership percentage greater than 2% may participate in a Section 105 plan but should ensure that the plan is set up directly by the business and premiums are paid by the business to realize a reduction of federal and state taxes. However, they will still incur FICA taxes (15.3% in 2019, to a maximum of $16,479.60 in 2019). These cannot be avoided.
4. C-Corporation – Owners of a C-Corporation may participate in the Section 105 plan and receive benefits of it entirely tax free. There are no restrictions on the use of a Section 105 plan with this type of company structure.

The enaction of a Section 105 plan also allows employees and business owners to have access to medical coverage – which is a huge savings in itself, since out of pocket costs to visit a hospital can be financially devastating.