Updated Blueprint for Employee-Spouse 105-HRA (Health Reimbursement Arrangement)
- Viktoriya Barsukova, EA, MBA
- Oct 24
- 4 min read
The Affordable Care Act and the One-Employee Exception
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
Example: How This Saves Money
Using a properly designed 105-HRA, Henry reimburses his employee-spouse $22,000 for medical expenses (health insurance, co-pays, and other 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.
(§105-HRA → has no IRS dollar cap; the employer determines the reimbursement amount.)
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)
To overcome this impediment, Henry hires his spouse as his one and only employee.
No Deduction Without the 105
The family health insurance plan is in Henry’s spouse’s name, so he does not qualify for the self-employed health-insurance deduction on page 1 of Form 1040.
105 Creates the Deduction
With the 105-HRA, Henry creates tax deductions where none existed before.
Without his spouse as employee, the $22,000 of medical expenses would appear as itemized deductions subject to the 7.5 percent AGI floor and would not reduce self-employment taxes.
In Henry’s case, his net itemized medical deduction would have been $0,4 producing no benefit versus a $10,406 cash savings under the plan.
Reimbursement Rules
Your 105-HRA may reimburse medical care expenses described in IRC §213(d).(5) See IRS Publication 502 for details.
Because this is a business plan (and thanks to CARES Act §3702), since 2020 your plan can also reimburse:(6)
Over-the-counter drugs and medicines for illness or injury
Menstrual care products
Your 105-HRA may not:(7)
Reimburse expenses incurred before the plan exists or before employee enrollment
Key point: If you qualify, put your plan in place now.
Eligible Expenses
The plan may reimburse expenses for:(8)
The employee
The employee’s spouse (you)
Dependents
Children under 27 at year-end
Key point: Use a family plan so all members are covered.
Documentation Strategies
The IRS often argues the spouse is not an employee.(9) To prove otherwise:
Issue a W-2 with a small salary (e.g., $1,000).
Keep weekly time sheets showing dates, tasks, and hours.(10)
Download templates:
Avoid employment contracts—they quickly become inconsistent. Time records work best.
Have your employee-spouse pay medical expenses from a separate personal account. If the business pays directly, have the spouse reimburse the business.
Handle reimbursements in a businesslike manner; the tax code requires substantiation before payment.(11)
Use a 105-HRA reimbursement request form and require monthly submissions.
Maintain a formal written plan document.(12)
Reasonable Compensation
Reimbursement is compensation to your spouse.(13) Ensure it is reasonable.
Example: 500 hours ÷ $22,000 = $44/hour ($91,520 annual equivalent). Adjust if needed.
Collect proof of market rates from salary guides, LinkedIn, or job ads and store in your file.
Discrimination Rules
Your 105-HRA can exclude:(14)
Employees with < 3 years service
Under age 25
Seasonal or part-time workers
Caution: Ensure your spouse still qualifies before excluding groups.
How the 105-HRA Works
The Section 105 plan turns personal medical expenses into business deductions.
It reimburses the employee-spouse for family medical expenses, making them business expenses deductible as employee benefits.
Single taxpayers can achieve similar benefits by operating as a C corporation and being its only employee.
Eligible Employees
Section 105 aggregates all businesses you and your spouse own.(15) All their employees count as yours.
Since the 105-HRA works for one eligible employee only, if you have more, consider a QSEHRA, ICHRA, or a group HRA.
Sole Source of Pay
Reimbursements can be the spouse’s sole compensation if reasonable, avoiding payroll tax filings. (Some pros still issue a W-2 as extra proof.)
Takeaways
When used correctly, the 105-HRA converts personal medical expenses into business deductions.
It works best for:
A spouse-employee in a Schedule C, E, or F business (or farm or partnership), or
A C-corporation owner with no other employees.
With multiple employees (< 50), use a QSEHRA or ICHRA instead.
This article includes a sample 105-HRA plan and reimbursement form.
Client Letter on This Article:
Footnotes
2 For reference, 15.3 percent gross self-employment tax rate = 14.13 percent effective (15.3 % × 92.35 %).
4 Based on Henry’s AGI of $300,000 and 7.5 % floor ($22,500), no deduction on $22,000 expenses.
10 Ibid.
Updated Blueprint for Employee-Spouse 105-HRA (Health Reimbursement Arrangement) - This information is based on materials from Bradford Tax Institute.
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