Section 105 plans for S corp owners

[taxcouple]

I am new to this forum, so forgive me if this has already been addressed. I am trying to determine the viability of having an S corporation use a section 105 health reimbursement arrangement to pay the out-of-pocket medical expenses of the 50/50 owners (husband & wife) in order to allow a deduction for AGI on their personal income tax return. I spoke with an individual of a company that provides such plans, and he indicated that in IRS Headliner Volume 41, the next to last paragraph, the 'plan' discussed would include a section 105 plan. On a related note (for a single-owned S corporation), he also said a section 105 plan should satisfy the IRS Headliner Volume 163 requirement of having the plan in the name of the S corporation, even if the 105 plan is essentially reimbursing the owner for insurance the owner has in his individual name.

I had read some literature indicating that section 105 plans were not available to owners of S corps since they were treated as self-employed individuals and not employees for this purpose; however, perhaps that was just regarding the issue of excluding the reimbursement from gross income. Since the reimbursement from the 105 plan in this case would not be excluded from personal gross income (it would be in wages, but then deductible as self-employed insurance for AGI) perhaps this works to allow the owners to personally take advantage of this type of plan.

I also have seen literature indicating that HRA plans have to utilize an independent 3rd party claims reviewer if the plan includes reimbursement for uninsured health expenses. I'm not sure if this is an IRS requirement, a HIPAA requirement, or whether the statement is even accurate. If it is accurate, I’m not sure what expenses would be treated as 'uninsured' if the 105 plan provides broad coverage of many types of medical expenses. And what constitutes an ‘independent 3rd party’? Could a relative who does not work for the S corporation fill that role? Does it matter for any of these issues if the only employees of the S corporation are the husband & wife owners and their children?

Any experiences or thoughts from anyone would be greatly appreciated before I pursue further communication with the company marketing these plans.

[Bees Knees]

My understanding of the situation is pretty much summed up in what you just said. You need to have a Section 105 plan if you want to take the self employed health insurance deduction for S corp shareholders (unless of course you can get the insurance company to put the insurance in the name of the corporation).

As to the rules on getting a 3rd party to verify expenses that qualify under an HRA, I believe those rules apply when the Section 105 plan issues a debit card to the participant which basically allows the participant to buy anything he or she wants. Normally, you would submit receipts to the plan before you could get money out to be reimbursed. The debit card sort of allowed the plan participants to self substantiate their expenses. Thus the requirement to have verification, or else the plan fails to be an HRA.

I’m not sure of all the rules and whether they are in final reg form yet, but that is what I recall reading.