Yes, a partnership can establish a Section 105 plan — but partners themselves cannot directly participate in it. The IRS treats partners as self-employed individuals under IRC Section 401(c)(1), which means they do not qualify as “employees” for purposes of tax-free medical reimbursements under Section 105 of the Internal Revenue Code.
This creates a real problem for partnerships that want to offer health benefits to their owners. Under IRC Section 1402(a), a partner’s distributive share of income is subject to self-employment tax — confirming their status as self-employed, not employees. The direct consequence is that any reimbursement a partner receives through a Section 105 plan becomes taxable income rather than a tax-free benefit.
Roughly 56% of small businesses now explore alternatives to traditional group health insurance, including HRAs and other Section 105 arrangements. Partnerships that understand these rules can still unlock major tax savings — but only if they follow the IRS requirements carefully.
Here’s what you’ll learn in this article:
- 🏥 Why partners are locked out of direct Section 105 participation and the specific IRS code that creates this barrier
- 💍 How the spousal employee workaround lets partners access benefits indirectly — and the strict requirements to make it audit-proof
- ⚠️ Why husband-wife partnerships are completely disqualified and what to do instead
- 📊 How partnerships compare to C-corps, S-corps, and sole proprietorships for Section 105 eligibility
- 🛡️ The costly mistakes partnerships make when setting up Section 105 plans and how to avoid IRS penalties
What Exactly Is a Section 105 Plan?
A Section 105 plan is an employer-funded health benefit that reimburses employees for medical expenses and health insurance premiums on a tax-free basis. The employer — not the employee — pays for the plan. Employees cannot contribute through salary deductions.
The IRS requires every Section 105 plan to have a formal written plan document that outlines eligible expenses, employer contributions, and other plan details. The employer sets a monthly or annual allowance for each employee. As employees incur medical costs, they submit receipts and documentation for reimbursement.
These plans are not health insurance. They are a tax-advantaged reimbursement mechanism that allows businesses to deduct the cost of medical reimbursements while employees receive the money free of federal income tax and payroll taxes. This dual tax benefit is what makes Section 105 plans so attractive for small businesses.
Eligible Expenses Under Section 105
Section 105 plans can reimburse a wide range of medical expenses as defined in IRS Publication 502. This includes individual health insurance premiums, dental and vision insurance, prescription costs, Medicare premiums, COBRA premiums, and out-of-pocket medical expenses. The plan document determines which specific expenses the employer chooses to cover.
Employers must ensure that employees substantiate each claimed expense with proper documentation such as receipts and explanations of benefits. Both the employer and employee should retain these records for ten years. Failing to document expenses properly is one of the fastest ways to lose the tax-free status of reimbursements during an IRS audit.
Common Types of Section 105 Plans
Section 105 plans come in several forms. The most popular today are health reimbursement arrangements (HRAs). Each type has different rules about who can participate, how much can be reimbursed, and whether they work alongside group health insurance.
| Plan Type | Key Feature |
|---|---|
| QSEHRA (Qualified Small Employer HRA) | Limited to businesses with fewer than 50 employees; annual allowance caps apply ($6,450 individual / $13,100 family in 2026) |
| ICHRA (Individual Coverage HRA) | No business size limits; no allowance caps; employees must have individual health insurance |
| Integrated HRA (GCHRA) | Must be offered alongside a group health insurance plan; reimburses out-of-pocket costs only |
| EBHRA (Excepted Benefit HRA) | Can be offered with or without group coverage; limited to $2,150 per year (2026); covers limited-scope expenses |
| MERP (Medical Expense Reimbursement Plan) | A general Section 105 plan that reimburses broad medical expenses; often used by sole proprietors and partnerships |
The QSEHRA and ICHRA are the two standalone HRA options most relevant to partnerships because they can be offered without a group health insurance policy in place.
Why Partners Cannot Directly Participate
The core issue is straightforward: the IRS does not consider partners to be employees. Under IRC Section 401(c)(1), partners are classified as self-employed individuals. Section 105 tax-free benefits are reserved exclusively for W-2 employees. A partner receiving a K-1 — not a W-2 — falls outside that definition.
This rule applies to all types of partners. It does not matter whether someone is a general partner, limited partner, or a member of an LLC taxed as a partnership. The IRS looks at tax classification, not the title on a business card. If the business files Form 1065 and issues Schedule K-1s to its owners, those owners are partners for tax purposes.
The consequence is direct and costly. If a partner receives a reimbursement through the partnership’s Section 105 plan, that reimbursement must be included in the partner’s gross income. It becomes taxable. The partner loses the entire tax advantage that makes these plans worthwhile — and the partnership may face penalties for improper plan administration.
The Self-Employment Tax Connection
The IRS confirms partner status through self-employment tax rules. Under IRC Section 1402(a), a partner’s distributive share of partnership income is subject to self-employment tax. This classification as “self-employed” is what blocks partners from Section 105 participation.
The Tax Court reinforced this in Renkemeyer, Campbell & Weaver, LLP, where the court held that partners who performed services for the partnership were subject to self-employment tax on their distributive shares. The court stated that a partner’s income “arose from legal services performed on behalf of the law firm” and was therefore earned income — not passive investment income.
This matters for Section 105 purposes because the same tax classification that subjects partners to self-employment tax is what prevents them from receiving tax-free employee benefits. You cannot be both self-employed and an employee of the same entity for federal tax purposes.
The Spousal Employee Workaround That Changes Everything
Partners cannot participate directly — but there is a legitimate workaround. If a partner’s spouse works as a bona fide W-2 employee of the partnership, that spouse can participate in the Section 105 plan. The partner then gets covered as a dependent under the spouse’s plan.
This is not a loophole. The IRS has acknowledged this arrangement as valid when done properly. The spouse-employee receives medical reimbursements tax-free, and those reimbursements can cover the entire family — including the partner. The partnership deducts the reimbursements as a business expense.
The critical word is “bona fide.” The IRS scrutinizes spousal employment heavily. You cannot simply put your spouse “on the books” to access tax benefits. The spouse must perform real, meaningful work for the business. Part-time work counts, but it must be legitimate and non-trivial.
What “Bona Fide Employee” Actually Means
The IRS looks at several factors to determine whether a spouse is a genuine employee. A written employment agreement should exist. The spouse should have defined duties, a work schedule, and reasonable compensation for the services performed.
Courts have upheld spousal employment arrangements where the employee-spouse was clearly qualified to perform the assigned work. The Section 105 plan must be established in writing, and reimbursements must be designated as a form of compensation for the employee-spouse. Without this documentation, the IRS can disallow the entire arrangement.
The compensation must be reasonable in relation to the work performed. You cannot reimburse $100,000 through an HRA if your spouse’s work does not justify that level of compensation. Your written Section 105 plan should include a maximum annual reimbursement cap to stay within reasonable compensation limits.
Can Section 105 Be the Sole Compensation?
Yes. The IRS has stated that you may be able to provide your employee-spouse’s total compensation in the form of Section 105 plan reimbursements. When this is the case, you do not need to issue a W-2 or withhold federal payroll taxes. This eliminates payroll tax obligations entirely.
This makes the 105-HRA the sole source of the spouse’s remuneration, which removes the need to set up a full payroll system for a spouse-only operation. The medical expense reimbursements become the compensation itself. This is a powerful strategy for partnerships with no other employees.
The spouse should pay all medical expenses from a separate personal checking account. If the partnership pays a medical expense directly, the spouse should reimburse the partnership first. This separation of funds creates a clean audit trail that protects the arrangement if the IRS asks questions.
Three Real-World Scenarios Every Partnership Should Know
Scenario 1: Two-Partner Law Firm With W-2 Staff
Marcus and David run a law firm structured as a partnership. They have three W-2 paralegals and two W-2 administrative staff. Marcus’s wife, Elena, works part-time as the firm’s bookkeeper and receives a W-2.
The firm establishes a QSEHRA for all W-2 employees, including Elena. Marcus is covered as Elena’s dependent. David, whose spouse does not work for the firm, cannot participate in the plan and must find individual coverage on his own.
| Person | Section 105 Outcome |
|---|---|
| Marcus (partner) | Cannot participate directly; covered as Elena’s dependent |
| David (partner) | Cannot participate; spouse does not work for the firm |
| Elena (Marcus’s spouse, W-2 employee) | Full tax-free reimbursements for herself and family |
| Paralegals and admin staff (W-2) | Full tax-free reimbursements |
Scenario 2: Design Firm With Spousal Employee
Lydia is a partner in a design firm structured as a partnership. Her husband, Carlos, works full-time in the business as a W-2 employee handling client relations. The business offers a QSEHRA, and Carlos participates. Lydia is covered under Carlos’s plan as a dependent.
The partnership deducts all reimbursements paid to Carlos as a business expense. Carlos receives his medical expense reimbursements tax-free. Lydia’s medical costs — including her health insurance premiums and dental work — are reimbursed through Carlos’s plan because she qualifies as his dependent.
| Person | Section 105 Outcome |
|---|---|
| Lydia (partner) | Covered as Carlos’s dependent under QSEHRA |
| Carlos (Lydia’s spouse, W-2 employee) | Participates directly; receives tax-free reimbursements for entire family |
Scenario 3: Husband-Wife Partnership (Disqualified)
Tom and Sarah are married and run a consulting business together as equal partners. They both receive Schedule K-1s. Neither qualifies as a W-2 employee of the partnership.
Because Sarah is a partner, she cannot be a bona fide employee for Section 105 purposes. A partnership between a husband and wife does not qualify for a Section 105 plan using the spousal workaround. Tom cannot cover Sarah as a dependent because Sarah is not an employee — she is an owner. The same applies in reverse.
| Person | Section 105 Outcome |
|---|---|
| Tom (partner) | Cannot participate; no eligible spousal employee exists |
| Sarah (partner and spouse) | Cannot participate; partner status disqualifies her as a W-2 employee |
Their only option is to restructure. One spouse could leave the partnership and become a W-2 employee, or the business could convert to a C-corporation where both owners would qualify as W-2 employees.
Why Husband-Wife Partnerships Are Completely Locked Out
This deserves its own discussion because it is one of the most common mistakes. When both spouses are partners, neither can serve as the W-2 employee needed for the spousal workaround. The IRS is explicit on this point: a partnership between a husband and a wife will not qualify for a Section 105 plan.
The reason is simple. The spousal workaround requires one person to be a partner (self-employed) and the other to be a W-2 employee. When both spouses are partners, there is no W-2 employee in the household. The partner’s spouse must be a bona fide employee, and a fellow partner does not meet that definition.
This is a structural problem — not a paperwork issue. You cannot fix it by simply calling one spouse an “employee” while both remain on the partnership agreement. The IRS looks at the actual legal structure, not labels. If both names appear on the Form 1065 as partners receiving K-1 income, the arrangement fails.
Restructuring Options for Husband-Wife Teams
The most common fix is to remove one spouse from the partnership entirely. That spouse becomes a W-2 employee of the business, receiving wages and performing documented work. The remaining spouse continues as the sole partner (or the business converts to a single-member LLC taxed as a sole proprietorship).
Another option is converting the entity to a C-corporation. In a C-corp, both owners qualify as W-2 employees and can participate directly in the Section 105 plan. There is no need for the spousal workaround at all. The trade-off is double taxation on corporate profits, which may or may not be worth the health benefit savings.
How Partnerships Stack Up Against Other Business Types
Section 105 eligibility varies dramatically depending on how a business is structured. Understanding these differences helps partnership owners evaluate whether their current entity type is costing them valuable health benefit deductions.
| Business Type | Owner Eligibility for Section 105 |
|---|---|
| C-Corporation | Yes. Owner-employees participate directly; full tax-free benefits with no spousal workaround needed |
| S-Corporation (less than 2% ownership) | Yes. Active owners with less than 2% ownership are treated as employees |
| S-Corporation (2% or greater ownership) | No. Reimbursements are subject to federal and state income tax (exempt from FICA); family members are treated as constructive owners |
| Partnership / LLC taxed as partnership | No. Partners are self-employed; spousal employee workaround required for indirect access |
| Sole Proprietorship | No. Owner is self-employed; same spousal workaround applies as partnerships |
The C-corporation offers the best Section 105 access for owners. The partnership and sole proprietorship are the most restrictive, requiring a legitimate spousal employee. The S-corporation falls in the middle — owners with more than 2% interest face limitations but still receive partial tax benefits since reimbursements avoid FICA taxes.
Why C-Corps Have the Biggest Advantage
A C-corporation is a separate legal entity from its owners. This means the corporation employs its shareholders, pays them W-2 wages, and can offer them the same Section 105 benefits as any other employee. There is no self-employment classification issue.
The downside is double taxation — the corporation pays tax on its profits, and shareholders pay tax again on dividends. For some partnerships considering a conversion, the Section 105 tax savings may not outweigh the additional corporate tax burden. A detailed analysis with a tax professional is essential before making this switch.
Where S-Corps Fall Short
S-corporation owners with 2% or greater ownership are treated similarly to partners for health benefit purposes. Their Section 105 reimbursements are not completely tax-free — they are subject to federal and state income tax, though they do avoid FICA taxes. Family members, including spouses and children, are treated as if they have ownership through constructive ownership rules under IRC Section 318.
The spousal workaround that works for partnerships does not work for S-corps. Because family members who do not have actual ownership are treated as if they did, hiring a spouse as a W-2 employee does not solve the problem. This is a critical distinction that catches many S-corp owners off guard.
Section 105(h) Nondiscrimination Rules Partnerships Must Follow
Any partnership offering a Section 105 plan to its W-2 employees must comply with Section 105(h) nondiscrimination rules. These rules exist to prevent businesses from designing plans that unfairly favor highly compensated employees (HCEs) over rank-and-file workers.
The IRS defines a highly compensated individual as someone who is one of the top five highest-paid officers, a shareholder owning more than 10% of the company’s value, or among the highest-paid 25% of all employees. Plans cannot give these individuals better benefits or earlier eligibility.
There are three main components to the 105(h) nondiscrimination test: the Eligibility Test, the Benefits Test, and the Operational Discrimination Test. Failing any of these tests means that reimbursements paid to highly compensated individuals become taxable income — while non-HCE employees keep their tax-free benefits.
How Partners Affect Testing
Partners are disregarded for purposes of nondiscrimination testing because they cannot participate on the same tax-favored basis as employees. This means a partnership can offer more generous benefits to partners — such as paying 100% of a partner’s health coverage — without violating the nondiscrimination rules.
This is actually good news for partnerships. Contributing 100% toward a partner’s health coverage while requiring W-2 employees to make a monthly contribution will not cause an issue under Section 125 or Section 105(h) nondiscrimination rules. The partner’s coverage is handled through partnership tax rules, not through the Section 105 plan.
Ownership Attribution: The Hidden Trap
The IRS uses constructive ownership rules under IRC Section 318 to determine who is really an “owner” for benefit plan purposes. These rules can disqualify family members who appear to be legitimate employees but are treated as owners by association.
Under attribution rules, ownership can be attributed to spouses, children, grandchildren, and parents. If a partner owns 50% of a partnership, the IRS may treat the partner’s spouse as also having an ownership interest — even if the spouse’s name appears nowhere on the partnership agreement. This is why it is critical to consult a tax professional regarding attribution rules before establishing a Section 105 plan.
For partnerships, attribution rules primarily matter when determining whether the spousal employee workaround is valid. The good news is that partnership attribution rules under IRC Section 267 are narrower than S-corp rules, which makes the spousal workaround viable in most partnership scenarios where the spouse is not a partner.
Costly Mistakes Partnerships Make With Section 105 Plans
Mistake 1: Listing a Partner as a Plan Participant
Some partnerships add partners directly to the Section 105 plan roster. This is invalid because partners are self-employed under IRS rules. The negative outcome: every reimbursement the partner receives becomes taxable income, and the partnership may face penalties for improper plan administration.
Mistake 2: Calling a Spouse an “Employee” Without Proof
The IRS requires the spouse to be a bona fide employee performing meaningful work. Simply putting a spouse on the books without real duties is not enough. The negative outcome: the IRS disallows the entire Section 105 deduction and may reclassify all reimbursements as taxable distributions.
Mistake 3: Not Having Written Plan Documents
The IRS mandates written plan documents that outline eligible expenses, contribution amounts, and other plan specifics. Operating without them is not an option. The negative outcome: the plan is treated as if it does not exist, and all reimbursements become taxable.
Mistake 4: Both Spouses Remaining as Partners
When both spouses are partners, the spousal workaround does not work. Keeping both as partners while trying to access Section 105 benefits guarantees failure. The negative outcome: zero tax-free benefits for either spouse and potential audit risk.
Mistake 5: Failing to Keep Documentation for Ten Years
Employers and employees must retain substantiation records for each reimbursement for ten years. Many partnerships discard records after three or four years. The negative outcome: if audited, the partnership cannot prove expenses were legitimate, and all reimbursements may be reclassified as taxable.
Mistake 6: Exceeding Reasonable Compensation
Section 105 reimbursements paid to a spousal employee must be reasonable in relation to work performed. Reimbursing $80,000 in medical expenses for a spouse who works five hours per week raises immediate red flags. The negative outcome: the IRS disallows the excess amount and may impose accuracy-related penalties.
Do’s and Don’ts for Partnerships Using Section 105 Plans
| Do | Why |
|---|---|
| Do create a written plan document before making any reimbursements | The IRS requires formal documentation; without it, the entire plan is invalid |
| Do ensure the spousal employee performs real, documented work | The IRS scrutinizes spousal employment and requires bona fide services |
| Do keep a written employment agreement and timesheets for the spousal employee | Courts have upheld arrangements where clear employment documentation existed |
| Do set an annual reimbursement cap tied to reasonable compensation | Prevents exceeding the reasonable compensation standard during an audit |
| Do have the spousal employee pay medical expenses from a separate personal account | Creates a clean audit trail that separates business and personal finances |
| Do run nondiscrimination testing annually if you have multiple W-2 employees | Required under Section 105(h) to maintain tax-free status for all participants |
| Don’t | Why |
|---|---|
| Don’t add partners as direct participants in the Section 105 plan | Partners are self-employed and reimbursements become taxable income |
| Don’t assume both spouses can benefit when both are partners | Husband-wife partnerships are completely disqualified from the spousal workaround |
| Don’t fund the plan through employee salary deductions | Section 105 plans must be funded solely by the employer |
| Don’t reimburse expenses already covered by another plan | The IRS prohibits double-dipping on medical expense reimbursements |
| Don’t destroy reimbursement records before ten years have passed | IRS requires ten years of substantiation records for all Section 105 claims |
| Don’t skip consulting a tax professional on attribution rules | Ownership attribution can disqualify family members who appear eligible |
Pros and Cons of Section 105 Plans for Partnerships
| Pros | Cons |
|---|---|
| Partnership deducts reimbursements as a business expense, reducing taxable income | Partners cannot participate directly; only W-2 employees qualify for tax-free benefits |
| W-2 employees receive reimbursements free of income tax and FICA | Requires a bona fide spousal employee for partner to access benefits indirectly |
| Employer controls the budget with fixed annual allowances; no surprise premium increases | Husband-wife partnerships are completely excluded from the spousal workaround |
| Unused funds stay with the employer when an employee leaves or doesn’t use their full allowance | Must comply with Section 105(h) nondiscrimination testing, ERISA, HIPAA, and ACA rules |
| Spousal employee can receive total compensation as Section 105 reimbursements, eliminating payroll tax entirely | IRS heavily scrutinizes spousal employment arrangements; documentation burden is high |
| Helps partnerships recruit and retain employees by offering competitive health benefits | Reimbursement records must be kept for ten years; administrative burden is ongoing |
Step-by-Step: How a Partnership Sets Up a Section 105 Plan
Step 1: Confirm Your Business Structure
Verify that the partnership files Form 1065 and that all owners receive Schedule K-1s. If the business is an LLC, confirm it is taxed as a partnership. The entity’s tax classification — not its state-law label — determines Section 105 eligibility.
Step 2: Identify Eligible W-2 Employees
List all individuals who receive W-2s from the partnership. This includes staff, associates, and any spousal employees. Partners receiving K-1s are not on this list. Only W-2 employees are eligible for the plan.
Step 3: Establish Bona Fide Spousal Employment (If Applicable)
If a partner wants indirect access through a spouse, the spouse must be hired as a legitimate W-2 employee. Create a written employment agreement, define specific duties, set a work schedule, and establish reasonable compensation. Keep timesheets and employment records from day one.
Step 4: Choose the Right Type of Section 105 Plan
Select the plan type that fits the partnership’s size, budget, and goals. A QSEHRA works well for partnerships with fewer than 50 employees that want simplicity and fixed allowance caps. An ICHRA offers more flexibility with no allowance limits and the ability to offer different amounts to different employee classes.
Step 5: Draft the Written Plan Document
The IRS requires a formal written plan document before any reimbursements are made. The document must specify eligible expenses, employer contribution amounts, the plan year, employee eligibility criteria, and claims procedures. Many partnerships use a third-party administrator or benefits software to generate compliant documents.
Step 6: Set Monthly or Annual Allowances
The partnership decides how much to allocate per employee during the plan year. For QSEHRAs, the federal cap is $6,450 for self-only employees and $13,100 for employees with families in 2026. ICHRAs have no federal allowance limit, giving the partnership full control over budgets.
Step 7: Communicate the Plan to Employees
Employees need a summary plan description (SPD) under ERISA. This document explains how the plan works, what expenses qualify, how to submit claims, and what happens if they leave the partnership. QSEHRA participants must also receive a written notice at least 90 days before the start of the plan year.
Step 8: Process Claims and Maintain Records
As employees incur medical expenses, they submit documentation for reimbursement. The partnership — or its administrator — reviews each claim for eligibility and reimburses accordingly. All substantiation records must be retained for ten years.
Federal Compliance Rules That Apply to Every Partnership Plan
ERISA Requirements
Section 105 plans are classified as employee welfare plans under ERISA. This means the partnership must provide a summary plan description to every participant. The plan must follow ERISA’s fiduciary standards, reporting requirements, and claims procedures.
There is an important exception. Partnerships with no common-law employees other than the spouse may qualify for an ERISA exemption in certain scenarios. A tax professional can help determine whether this applies to your situation.
HIPAA Privacy Rules
Because Section 105 plans involve processing medical expense claims, they fall under HIPAA privacy rules. The partnership — or anyone administering the plan — receives protected health information that must be kept confidential. Violations can result in significant fines.
COBRA Continuation Coverage
COBRA rules apply to partnerships with 20 or more employees. When an employee terminates, the partnership must offer the option to continue Section 105 plan participation for a specified period. The employee can be charged up to 102% of the benefit value during the COBRA continuation period.
ACA Preventive Care and Dependent Coverage
The Affordable Care Act requires Section 105 plans to cover preventive health services without cost-sharing. Plans that provide dependent coverage must extend it to adult children up to age 26. Partnerships must also pay the annual PCORI research fee through IRS Form 720.
Key IRS Forms and Reporting Obligations
Partnerships with Section 105 plans have specific reporting obligations that go beyond the plan itself. Understanding each form and its deadline prevents late-filing penalties.
| Form / Obligation | Purpose |
|---|---|
| Form 1065 (Partnership Return) | Reports partnership income and deductions, including Section 105 plan deductions as a business expense |
| Schedule K-1 | Issued to each partner; Section 105 reimbursements to partners (if any) are not tax-free and must be reported as income |
| W-2 (for spousal/other employees) | Reports wages paid to W-2 employees; Section 105 reimbursements are excluded from Box 1 wages when the plan is properly administered |
| Form 720 (PCORI Fee) | Annual ACA research fee that plan sponsors must pay |
| Form 5500 (if applicable) | Required for ERISA-covered plans with 100 or more participants; smaller plans may be exempt |
How Much Can a Partnership Save With a Section 105 Plan?
The tax savings depend on the partnership’s tax bracket, the number of W-2 employees, and the total amount of medical expenses reimbursed. A partnership in the 24% federal tax bracket that reimburses $15,000 in medical expenses through a Section 105 plan saves roughly $3,600 in federal income tax on the deduction alone.
The employee also saves. A W-2 employee in the 22% federal bracket who receives $10,000 in tax-free reimbursements avoids approximately $2,200 in federal income tax plus 7.65% in FICA taxes ($765). The combined employer-employee tax savings on just $10,000 in reimbursements can exceed $4,000.
For partnerships using the spousal workaround where the Section 105 plan is the sole compensation, the savings are even larger. There are no payroll taxes to pay — no Social Security, no Medicare, no FUTA. The medical expenses that the family would have paid out-of-pocket with after-tax dollars become fully deductible business expenses.
FAQs
Can a partner receive tax-free reimbursements under Section 105?
No. Partners are classified as self-employed under IRC Section 401(c). Any reimbursement a partner receives through a Section 105 plan is included in taxable income.
Can a partnership set up a Section 105 plan for its W-2 employees?
Yes. Any partnership can establish a Section 105 plan for W-2 employees. Only partners themselves are excluded from tax-free participation.
Does the spousal employee workaround work for partnerships?
Yes. A partner’s spouse who is a bona fide W-2 employee can participate, and the partner is covered as a dependent under the spouse’s plan.
Can a husband-wife partnership use a Section 105 plan?
No. When both spouses are partners, neither qualifies as a W-2 employee. A husband-wife partnership is disqualified from the spousal workaround entirely.
Does the spouse need to work full-time to qualify?
No. Part-time work qualifies as long as the work is legitimate and non-trivial. The IRS requires meaningful services, not a minimum number of hours.
Can the Section 105 plan be the spouse’s only compensation?
Yes. The IRS allows total compensation to be paid as Section 105 reimbursements. No W-2 or payroll taxes are needed in that case.
Do partnerships need a written plan document?
Yes. The IRS mandates formal written documentation before any reimbursements are made. Operating without one invalidates the entire plan.
Can an LLC use a Section 105 plan?
Yes, but it depends on tax classification. An LLC taxed as a partnership follows partnership rules. An LLC taxed as a C-corp follows C-corp rules.
Are Section 105 reimbursements subject to FICA tax?
No. Properly administered reimbursements are excluded from FICA and FUTA for eligible W-2 employees. Partners do not receive this exclusion.
Can a partnership offer different allowances to different employees?
Yes, under an ICHRA. Partnerships can offer different amounts to different employee classes. QSEHRAs require the same allowance for all eligible employees based on family status.
Does COBRA apply to a partnership’s Section 105 plan?
Yes, if the partnership has 20 or more employees. Terminated employees must be offered continuation coverage under COBRA rules.
Can a partner deduct health insurance premiums another way?
Yes. Partners may be able to deduct health insurance premiums on their personal tax return under IRC Section 162(l). This is a separate deduction from the Section 105 plan.
Is a Section 105 plan the same as an FSA?
No. An FSA is employee-funded through salary reductions. A Section 105 plan is employer-funded only. Employees cannot contribute to a Section 105 plan.
How long must a partnership keep Section 105 records?
Both employers and employees should keep substantiation records for ten years. This includes receipts, explanations of benefits, and claims documentation.
Can a limited partner participate in a Section 105 plan?
No. The IRS treats all partners — general and limited — as self-employed for benefit purposes. Limited partner status does not change Section 105 eligibility.
Related reading
- Is a General Partner Subject to Self-Employment Tax? (w/Examples) + FAQs
- How Are General Partnerships Taxed? (w/Examples) + FAQs
- Are Limited Partners Subject to Self-Employment Tax? (w/Examples) + FAQs
- How Does a Section 105 Plan Work? (w/Examples) + FAQs
- Can an LLC Have a Section 105 Plan? (w/Examples) + FAQs
- Can a Sole Proprietor Have a Section 105 Plan? (w/Examples) + FAQs
- Is Section 105 Reimbursement Taxable Income? (w/Examples) + FAQs