Article Date:
April 2024

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Updated Blueprint for Employee-Spouse 105-HRA (Health Reimbursement Arrangement)

The Affordable Care Act does not apply to a business that has only one employee.1


This opens the door for what we are going to call the 105-HRA. We created this name from its two predecessors:



The Section 105 medical reimbursement plan


The health reimbursement arrangement


The 105-HRA gives you the best possible medical reimbursement plan—if you can qualify. The first requirement is to have one employee only. The second requirement is to operate the business as one of the following:



Proprietorship reporting on Schedule C of IRS Form 1040


Partnership filing IRS Form 1065


Real estate rental business rising to the level of a business and reporting on Schedule E of Form 1040


Farm business reporting on Schedule F of Form 1040


C corporation filing IRS Form 1120


Before getting into the details of how you make this work for you if you are one of the taxpayers who fit this niche, let’s look at an example of how this can save money.


Example. Using a properly designed 105-HRA, Henry reimburses his employee-spouse $22,000 for medical expenses (health insurance, co-pays, and other medical expenses not covered by insurance). Henry is in the 24 percent federal tax bracket, the 15.3 percent self-employment tax bracket,2 and the 8 percent state tax bracket. With the 105-HRA, Henry saves $10,406 in taxes this year and likely a similar amount every year he is in business.


Why This Works for Henry and Saves Him $10,406


Henry operates his business as a proprietorship. Tax law does not consider proprietors to be employees for purposes of medical plans.3 This means there are no business deductions on the proprietorship tax return for Henry’s medical expenses. To overcome this impediment, ... Log in to view full article.

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