What is MED 105?

MED 105 is the TaxCentral name for a "medical expense reimbursement plan" designed for small businesses. "Medical expense reimbursement plan" is the term the IRS uses to describe a plan like MED 105 in the tax code, which is authorized under Internal Revenue Code Section 105.

How does a MED 105 plan work?

After the plan is adopted by the business entity, participating employees give the business a list of medical care expenses for them and their dependants. The employer writes a check to "reimburse" the employee for the medical care expenses. The reimburements are a tax deduction for the company, but are not taxable income to the employee.

What businesses qualify for a MED 105 plan?

The simple answer is "all". All businesses will realize a tax benefit by implementing a MED 105 plan. The BEST application of a MED 105 plan is for the self-employed that has a spouse who is active in the business. The small business owner hires their spouse and adopts a MED 105 plan. The spouse then requests reimbursement for the family's medical expenses under the plan. All of the family's medical costs are now a tax deduction for the business.

I don't formally pay my spouse, but my spouse works the business with me. How does the MED 105 plan work for me?

If your spouse provides services to your business, those services should generate compensation for your spouse. Simply begin paying your spouse a salary or hourly wage with the required payroll withholdings. Now you have an employee and your business qualifies for a MED 105 plan.

I'm in a partnership and I'm wondering if MED 105 works for our business?

Yes. MED 105 works for all businesses regardless of the business entity. By business entity, we mean corporations, S corporations, partnerships, sole-proprietorships, and limited liability companies.

Are the tax savings real or is this some type of "phantom" tax savings scheme?

The tax savings are real. The amount of savings will vary from business to business because of the differences in the amount of reimbursed expenses, individual tax rates, and tax brackets. Medical expense reimbursement plans have been around for over 20 years. The IRS authorizes these types of plans in section 105 of the IRS code.

What types of medical care expenses can be reimbursed in a MED 105 plan?

The IRS says that any medical care expense that qualifies for a deduction on schedule A of a personal income tax return can be reimbursed under a MED 105 plan. Qualifying medical expenses include: health insurance premiums, eye care, prescription drugs, dental and orthodontics, out of pocket costs for doctors, clinics, hospitals, emergency rooms, and some travel and lodging.

How much can be reimbursed to employees?

The IRS does not specify an annual minimum or maximum. The employer determines the amount that is best for the business and employees.

I take a deduction for self-employed health insurance already. Does MED 105 affect that deduction?

Yes, under a MED 105 plan you will no longer have a self-employed health insurance deduction that is included on page one of your tax return. Rather, 100% of your health insurance will be reimbursed to your employee spouse from your business. The reimbursements will qualify as a "business expense" and be fully deductible. The tax benefit strategy is significant since you save not only "regular" tax on the premiums but also self-employment tax of up to 15.3%. In addition, the other medical expenses that you incur other than health premiums are also included under the plan. This savings impact can be much bigger than the self employed tax savings on the health premiums.

Are the reimbursements classified as income to my employees?

No. The IRS is very specific about excluding medical reimbursements from the gross income of the employee.

Can my spouse be an employee?

Certainly. In fact, if your spouse is already active in the business, the IRS could determine that your spouse is an employee already. To qualify for a MED 105 plan, just formalize the arrangement by paying compensation to your spouse.

I've never had an employee but I've heard there is a lot of paper work and tax reports to file with the IRS. How can I handle that?

Having an employee does create the requirement to prepare some payroll tax returns for both the IRS and your state "employment" agency. For the IRS and most states, a quarterly payroll tax return is required which reports wages paid, taxes withheld from employees, and employer tax to be paid. There are solutions to the paper work preparation issues. TaxCentral, LLC. can arrange to handle that for you as well.

How can I estimate the tax savings from a MED 105 plan?

Here are a couple of rough guidelines; 1) if most of your income is from schedule C and your taxable income is less than $43,000, then multiply your medical expenses by 35%; or, 2) if your taxable income is more than $43,000, multiply your medical expenses by 48%. The resulting amount is in the tax savings ballpark. For more detail check out our detailed tax calculator to help you determine how much you could potentially save. MED 105 Calculator.

How do I set up a MED 105 plan for my business?

It's easy. Click on the application button. Complete the application and then click submit. We will prepare your MED 105 plan and send it to you via priority mail. Your package will include everything needed to implement a medical expense reimbursement plan including a step-by-step checklist.

What if I am audited by the IRS?

We will assist you with the IRS audit. Our CPA's have over 30 years experience in dealing with the IRS in taxpayer examinations. Simply fax us a copy of the IRS examination notification letter and we'll call you back to discuss your options and strategies (The initial call is free). If the IRS disallows your MED 105 plan document, TaxCentral, LLC. will pay any interest and penalties associated with the disallowance.