Section 105 Plans - For the Self-Employed

What is a Section 105 HRA?

Self-Employed* Individuals, Or Employees Of Sole Proprietors, Corporations, Limited Liability Companies, And Partnerships — Can Reduce The Exorbitant Cost Of Health Insurance And Out-Of-Pocket Medical Expenses By Establishing A Section 105 HRA Plan, Or Medical Expense Reimbursement Plan. However, business owners generally cannot participate in a Section 105 HRA plan, but legitimate employees and spouses who are employees can participate. (*C corporation and S corporation owners can participate as long as they're receiving a regular paycheck as an employee.)

Section 105 has been in existence since 1954, and gained momentum in the agricultural industry since farmers use the plans to provide tax deductions to family members employed on the farm. Currently, Section 105 HRA plans are used by over 50,000 small businesses. Approximately $3,500 per year is the average tax savings. 

Section 105 of the Internal Revenue Code, Revenue Ruling 71-588 and IRS Letter Ruling 9409006. (Click the blue links to see Section 105 of the Code plus the Revenue and Letter Rulings that allow you to take advantage of this concept.)

Self-Employed Health Insurance Deductions

Without a Section 105 HRA With a Section 105 HRA 
(For spouse/employee)

100% of health insurance premiums are tax deductible, except it does not reduce the income being taxed for Social Security Taxes (Only affects income tax.) So, the 15.3% self employment tax is still paid on insurance premiums.

Social Security taxes are eliminated for the employee and the employer.

Medical Expenses are tax deductible if itemize deductions, in excess of 7.5% Adjusted Gross Income (AGI).

Example: If AGI is $50,000 and you have $5,000 in out-of-pocket medical expenses, you can only deduct $1,250 ($50,000 X .075 = $3,750, and $5,000 - $3,750 = $1,250)

Employer can deduct the entire medical expense.


When Establishing A Section 105 HRA It Is Essential That A Legitimate Employer/Employee Relationship Exist With The Family Member. In 1999 the IRS Industry Specialization Program offered a coordinated issue paper regarding Section 105 and the spouse/employee issue that said: "The extent and nature of a spouse's involvement in the business operations is critical. Although, part-time work does not negate employee status, the performance of nominal or insignificant services that have no economic substance or independent significance may be challenged. Merely calling a spouse an "employee" is not sufficient to qualify a non-working spouse as an employee".

If the spouse provides meaningful services to the company, and if the employer would have to hire someone else to provide the same services if the spouse was not available for employment, then you qualify to establish a Section 105 HRA plan for your spouse.

Contact Benefit Providers today to get more information or click the link below to set up your Section 105 plan today with our partner TASC!

AgriPlanNOW and BizPlanNOW enable qualified small business owners to deduct 100% of federal, state, and FICA taxes for family medical costs, and on average save $4,000 or more a year! Key to these savings is the ability to declare medical expenses as a business expense rather than a personal deduction. Click image to learn more.