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How to Hire a Spouse and create a Section 105 plan for medical bills

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  • How to Hire a Spouse and create a Section 105 plan for medical bills

    I was curious if anyone on the site (incl Jim Dahle) have gone through the formal process of hiring a spouse on paper and what are the steps and documents needed to set this up legitimately, and I had an additional question about Section 105 plans.

    My wife and I are both doctors and it would be reasonable for me to hire her for medical opinions in certain cases.  (I have a full-time W-2 job but also have 1099 income from moonlighting as a Sole Proprietor/Independent Contractor, so the 1099 business income is what I am referring to.  I just report it on Schedule C each year in TurboTax.)  Also, my wife has some medical expenses that aren't covered by insurance, so I was thinking of setting up a Section 105 plan to pay these pre-tax.  This web site is a pretty good outline of what I'm talking about:

    I think their strategy is very interesting, of treating the medical payments as the compensation, therefore no payroll or other taxes are due.  They even cite a 2006 court case in which this approach was tested and found to be solid (IRS challenged and lost on all counts).

    Has anyone else done this?  If I want to actually/legitimately do this, can I do it on my own by just downloading all the documents from some business planning web site and filling out/signing them myself, or do I need to hire a lawyer (hoping the former)?  Thanks!

  • #2
    Read this first. I have read elsewhere on the web that an exception applies if the plan covers only one active employee, but this article appears to refute that. $100/day penalty is pretty stiff. The court case cited in your article was pre-Obamacare. Until I see a current court case similar to yours or can find it in the regs, I would be nervous about using a 105 plan. We had to disband ours after Obamacare, but ours was for multiple employees (owners were never qualified to participate, of course).
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