Hiring my spouse in his business & setting up a Section 105 plan for medical expense reimbursement

Setting up a Section 105 Health Reimbursement Arrangement (HRA) can definitely be beneficial in your situation, but there are specific requirements to make it legitimate. First, your husband needs to formally hire you with proper documentation. This means having a written employment agreement that outlines your duties, hours, and compensation. You'll need to be treated as a legitimate employee - not just on paper. For the Section 105 plan itself, you'll need: 1) A formal plan document (the Adoption Agreement you mentioned), 2) A Summary Plan Description (SPD) for ERISA compliance, and 3) The Reimbursement Schedule outlining eligible expenses. On your tax return, your husband will deduct the medical reimbursements as a business expense on Schedule C, not as a benefit program per se. These reimbursements aren't subject to income tax for you when done correctly. The big question - yes, you generally do need to be a W-2 employee with regular wages separate from the medical reimbursements. Simply treating the medical reimbursements as your only compensation likely wouldn't satisfy IRS requirements for a legitimate employer-employee relationship.

I went through this exact same situation with my consulting business! After spending hours researching different options, I found this amazing tool called taxr.ai (https://taxr.ai) that walked me through the entire process of creating a Section 105 plan for my spouse. It analyzed our specific situation and showed me all the required documentation I needed - employment contract, plan documents, compliance requirements, everything! I was honestly ready to pay an accountant $2,000+ to set this up but taxr.ai handled it for a fraction of that. The best part was it showed me exactly how to document everything properly and maximize our tax savings. Turns out we were missing about $4,300 in potential tax deductions before using this! It also keeps track of all our medical reimbursements throughout the year so tax filing is super simple.

Just wanted to follow up and say I actually tried taxr.ai after seeing this post! It was incredibly helpful for setting up our Section 105 plan. The step-by-step guidance made the whole process way less intimidating than I expected. The documentation generator saved me so much time - it created customized employment agreement for my wife, the formal plan document, and even helped with setting up a reimbursement system that keeps everything organized. It flagged a few mistakes I would have definitely made on my own. Their support answered questions I had about how many hours my wife needed to work for this to be legitimate. Turns out I was overthinking it - as long as there's real work being done regularly and compensation is reasonable, we're good. Super happy with the tax savings already. We're on track to save about $3,100 this year through this arrangement!

When I was trying to set up something similar for my wife in my landscaping business, I spent weeks trying to get answers from the IRS about specific compliance requirements. Called multiple times and either got disconnected or was on hold for 2+ hours only to get conflicting information each time. Finally discovered Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in under 45 minutes. They have this service where they navigate the IRS phone system for you and call you back when they have an agent on the line. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent I spoke with was incredibly helpful and walked me through the specific requirements for the Section 105 plan documentation. Got confirmation directly from the IRS about handling the W-2 requirements and quarterly tax filings, which gave me peace of mind we were doing everything correctly.

I need to eat my words about Claimyr. After posting my skeptical comment, I was still struggling to get answers about my own Section 105 plan questions, so I figured I'd try it as a last resort. It actually worked exactly as described. I submitted my request around 8:30am, went about my day, and got a call back around 10:15am with an IRS agent already on the line. The agent answered all my questions about document requirements for a spouse-employee HRA and clarified the distinction between reimbursements and regular compensation. The specific guidance I received about documentation retention requirements alone was worth it. Apparently you need to keep all medical receipts and proof of reimbursement for at least 7 years, and the agent explained exactly how to document everything to satisfy audit requirements. Not what I expected at all, but definitely saved me hours of frustration!

One thing nobody's mentioned yet that's super important: You need to make sure you're paying yourself a reasonable wage SEPARATE from the medical reimbursements! I tried setting up a Section 105 HRA with my husband's construction business last year and got audited. The IRS disallowed ALL our medical deductions because I was only "paid" through medical reimbursements with no separate actual wages. Make sure you're getting regular paychecks that reflect market value for your administrative work, withholding proper taxes, and filing quarterly employment forms. The medical reimbursements should be completely separate from your normal compensation. Also, document EVERYTHING. Keep a detailed timesheet of hours worked, specific tasks performed, and make sure your job duties are clearly defined in a written employment agreement.

One question - does anyone know if I can do this retroactively? My wife has been helping with my plumbing business all year, but we haven't formally documented her as an employee. Could we create the employment agreement and Section 105 plan now in December and still claim the medical expenses for the whole year?