Internal Revenue Code Section 105 Medical Reimbursement Plan

A Section 105 medical reimbursement plan is an employee benefit plan that reimburses qualifying employees for their out-of-pocket medical expenses.

This type of plan is used infrequently, and is compared and contrasted to the flexible spending account.

A flexible spending account works by using the employee’s money that has been set aside from each paycheck, and reimbursing them when they have out-of-pocket expenses. In other words, it’s the employee’s money.  Taxes are saved by reducing taxable gross pay.

In contrast, a medical reimbursement plan is all provided by the employer. No employee money is used. The reimbursement is tax-free and is deductible by the business, similar to the way health insurance works.

The medical reimbursement plan works particularly well in the situation where the business is a sole proprietorship, and it is operated by a husband and wife. One of the spouses is the sole proprietor and the other is the employee. That employee must be a bona fide employee, receive a W-2, and be able to document the validity of their employment with time records etc.

With a medical reimbursement plan in place, out-of-pocket medical expenses incurred by the employee or by his or her spouse or dependents, can be reimbursed by the business, and a full business deduction is taken on schedule C, reducing both income tax and self-employment tax.

If the taxpayer is Single, this type of plan works when the business is a C-Corporation.

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