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Section 105 HRA Tips - Key Elements to Successfully Utilize Section 105 HRA

April is here and known to all for the big tax deadline. At BASE® we find that this is the perfect time to remind you and your clients of some of the key elements to successfully utilize the Section 105 BASE® HRA, because all it takes is one misstep to put clients at risk for an audit – and lose.

Checking accounts established and handling of reimbursements:

  1. Establish payroll for employee to document compensation.
  2. Employee (spouse) pays for medical out of personal checking account.
  3. Employee submits qualifying medical expenses for reimbursement (preferably once per month).
  4. Employer (spouse) reimburses employee for expenses out of business account.

By following these steps, 105 plans will meet plan requirements, and more importantly, avoid bringing a 105 plan under fire in an audit. BASE® also helps provide all of the documentation and guide clients through these steps to ensure that plans are in compliance.

Let's take the case of Shellito vs. IRS. They were audited for taking this deduction because Mrs. Shellito was not seen as an employee because she was not compensated. Basically, the Shellito's failure to fully comply with the plan was a red flag to the IRS, and while the case was later reversed it could have been avoided altogether.

BASE® does its due diligence to make sure our clients understand all aspects of the plan and walk them through the process, including what steps to take to ensure the business is following the proper compensation and reimbursement procedures to avoid an audit such as this.

Remember, the Section 105 BASE® HRA has helped thousands of self-employed business owners across the country save an average of $4,700 each year in additional tax savings. By moving the deduction to a Schedule C, employers save self-employment taxes, gaining another benefit. Are your self-employed business owners, family farmers and ranchers aware of this tax savings benefit?

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