Yes, an LLC can have a Section 105 plan. The answer depends on how the LLC is taxed. An LLC taxed as a C-corporation gives owners the most benefit, while an LLC taxed as a sole proprietorship, partnership, or S-corporation faces restrictions on owner participation. Under IRC Section 105, qualified distributions from employer-funded health plans are excluded from an employee’s gross income — but the IRS treats LLC owners differently based on entity classification.
The IRS reports that self-employed individuals are not considered employees for purposes of accident and health plans. This creates a real problem for many LLC owners who want to deduct medical expenses through the business. About 47% of small businesses do not offer health benefits, often because owners believe they can’t afford them or don’t qualify.
Here’s what you’ll learn in this article:
- 💼 How each LLC tax classification affects your eligibility for a Section 105 plan
- 💰 The spouse-employee workaround that lets ineligible owners still get tax-free benefits
- ⚖️ Federal compliance rules under ERISA, HIPAA, ACA, and the IRS that apply to your plan
- 🚫 The most common mistakes LLC owners make when setting up a Section 105 plan
- ✅ Step-by-step guidance on creating and maintaining a compliant Section 105 plan
What a Section 105 Plan Does for LLC Owners
A Section 105 plan is not health insurance. It is an employer-funded health benefit that reimburses employees for medical expenses and health insurance premiums on a tax-free basis. The employer sets a monthly or annual allowance, and employees submit eligible expenses for reimbursement.
The plan must be funded entirely by the employer. No portion can come from employee salary deductions. The employer deducts reimbursements as a business expense, and those reimbursements are excluded from the employee’s gross income under IRC Sections 105 and 106.
Eligible expenses include health insurance premiums, dental and vision premiums, long-term care insurance, co-pays, deductibles, prescriptions, and any medical expense listed in IRS Publication 502. The employer can also limit which expenses qualify under the plan document.
How LLC Tax Classification Changes Everything
The IRS does not recognize an LLC as a separate tax classification. Instead, it looks at how the LLC elected to be taxed. This election controls whether the LLC owner can participate in a Section 105 plan and receive tax-free reimbursements.
Single-Member LLC (Taxed as Sole Proprietorship)
A single-member LLC is a disregarded entity for federal tax purposes. The IRS treats it as a sole proprietorship. The owner reports income on Schedule C of Form 1040.
Because a sole proprietor is self-employed, not an employee, the owner cannot receive tax-free reimbursements from a Section 105 plan. The IRS draws a hard line: self-employed individuals are not employees under accident and health plan rules.
The workaround is the spouse-employee strategy. If the owner’s spouse is a bona fide W-2 employee of the LLC, the business can set up a Section 105 plan that covers the employee-spouse and their family — which includes the owner. The plan reimburses the spouse, and the owner receives coverage as a dependent of the employee-spouse.
Multi-Member LLC (Taxed as Partnership)
A multi-member LLC defaults to partnership tax treatment. It files Form 1065 and issues Schedule K-1s to each member. Partners in a partnership are not considered employees. This means LLC members cannot receive tax-free reimbursements directly.
The same spouse-employee workaround applies here, but with an important restriction. A husband-wife partnership disqualifies both spouses from using this strategy. If both spouses are partners, neither can be treated as a W-2 employee, and the plan will not produce tax-free benefits for the owners.
LLC Taxed as a C-Corporation
An LLC that elects C-corporation tax treatment has the best Section 105 eligibility. A C-corp is a separate legal entity from its owners. Owner-employees are treated as W-2 employees and can participate fully in the plan.
C-corp owner-employees receive reimbursements 100% tax-free with no restrictions. The corporation deducts all reimbursements as a business expense. There is no need for a spouse-employee workaround because the owner already qualifies as an employee.
LLC Taxed as an S-Corporation
An LLC taxed as an S-corporation presents a unique problem. Shareholder-employees who own more than 2% of the company’s shares are not eligible for tax-free Section 105 reimbursements. The IRS treats these individuals similarly to partners.
If the S-corp reimburses a >2% owner through a Section 105 plan, the reimbursement is included on the owner’s W-2 as taxable income. The owner can then take the self-employed health insurance deduction on Schedule 1 of Form 1040 for insurance premiums, but other medical expenses would need to be itemized on Schedule A. Family members — including spouses, children, and parents — of >2% owners are also treated as if they are owners, which eliminates the spouse-employee workaround.
LLC Owner Eligibility at a Glance
| LLC Tax Classification | Owner Section 105 Eligibility |
|---|---|
| Single-member (sole proprietorship) | No direct tax-free benefits; spouse-employee workaround available |
| Multi-member (partnership) | No direct tax-free benefits; spouse-employee workaround available unless spouse is also a partner |
| C-corporation election | Yes — full tax-free participation as a W-2 employee |
| S-corporation election | No for >2% owners and their family members; limited to W-2 wage treatment |
The Spouse-Employee Strategy That Unlocks the Deduction
For single-member LLCs and multi-member LLCs taxed as partnerships, the spouse-employee strategy is the primary way owners access Section 105 benefits. Courts have upheld this approach when done correctly.
The spouse must be a legitimate W-2 employee who performs real work for the business. There is no minimum number of hours required per week, but the hours worked at a reasonable market rate must justify the value of the fringe benefit. For example, if the plan reimburses $20,000 per year and the spouse’s work has a market value of $40 per hour, the spouse needs to work at least 500 hours during the year.
A court case upheld the Section 105 deduction when two conditions were met: there was a written employment agreement between the proprietor and the spouse, and the Section 105 plan was established in writing with reimbursements designated as a form of compensation. The spouse must also be qualified to perform the assigned work.
How to Structure the Reimbursement Paper Trail
The IRS expects a clear paper trail. The employee-spouse should pay medical bills from an account in the spouse’s name. The business then reimburses the spouse from the business checking account. Paying from a joint account creates problems because it blurs who is making the payment and who is being reimbursed.
The reimbursement is reported on Schedule C, Line 14 under “Employee benefit programs” for sole proprietorships and single-member LLCs. The employee-spouse does not need to receive a separate salary — the Section 105 reimbursement can be the total compensation. But the value of the work performed must still support the amount reimbursed.
Three Real-World Scenarios LLC Owners Face
Scenario 1: Single-Member LLC Owner With a Spouse
Maria owns a single-member LLC taxed as a sole proprietorship. She wants to deduct $18,000 in family medical expenses. She hires her husband, Carlos, as a part-time bookkeeper. She creates a written Section 105 plan and a written employment agreement.
| Step | Result |
|---|---|
| Maria hires Carlos as a W-2 employee | Carlos qualifies for the Section 105 plan |
| Carlos enrolls in family coverage under the plan | Maria is covered as Carlos’s dependent |
| Carlos pays medical bills from his own bank account | Creates a clear reimbursement paper trail |
| Maria’s LLC reimburses Carlos from the business account | $18,000 deducted on Schedule C, Line 14 |
Scenario 2: Multi-Member LLC With Non-Spouse Partners
David and James co-own an LLC taxed as a partnership. Neither is related to the other. David’s wife, Lisa, works 15 hours per week as the office manager. David sets up a Section 105 plan for all W-2 employees.
| Step | Result |
|---|---|
| Lisa is hired as a W-2 employee of the LLC | She is eligible for Section 105 benefits |
| The plan covers Lisa and her family | David receives coverage as Lisa’s dependent |
| James’s spouse does not work for the LLC | James cannot use the spouse-employee workaround |
| James seeks coverage through other means | He may use the self-employed health insurance deduction on Schedule 1 |
Scenario 3: LLC Taxed as a C-Corporation
Sarah owns an LLC that elected C-corporation tax treatment. She is the sole owner and a W-2 employee. She sets up a Section 105 plan and enrolls herself.
| Step | Result |
|---|---|
| Sarah is a W-2 employee of the C-corp LLC | She participates directly in the plan |
| The plan reimburses $25,000 in family medical expenses | All reimbursements are 100% tax-free to Sarah |
| The C-corp deducts the full $25,000 | Business expense deduction reduces corporate taxable income |
| No spouse-employee arrangement needed | Sarah qualifies on her own as an employee-owner |
Federal Compliance Rules Your LLC Must Follow
A Section 105 plan is classified as a group health plan under federal law. This triggers multiple compliance obligations that apply regardless of how small the LLC is.
IRS Written Plan Document Requirement
The IRS requires a formal written plan document that outlines eligible expenses, employer contribution amounts, and plan specifics. Without this document, the IRS can disallow the deduction entirely. Both the employer and employees should retain supporting documentation for ten years.
Section 105(h) Nondiscrimination Rules
Self-insured plans, including Section 105 plans, must pass the Section 105(h) nondiscrimination tests. These tests ensure the plan does not favor highly compensated individuals (HCIs) over other employees. Two tests must be satisfied.
The Eligibility Test checks whether at least 70% of all employees benefit under the plan, or whether 70% are eligible and 80% of those eligible actually participate. The Benefits Test requires that the same benefits provided to HCIs are also available to all other participants. If the plan fails, all discriminatory benefits become taxable income for the HCIs.
A single-member LLC with only one employee (the spouse) has a simpler compliance path because there is no other employee class to compare. But once the LLC hires additional employees, nondiscrimination rules become critical.
ERISA, HIPAA, COBRA, and ACA Obligations
ERISA requires a summary plan description (SPD) that must be provided to each participant. The SPD explains how the plan works, what it covers, and the rights of participants.
HIPAA governs the privacy of protected health information (PHI) that is collected during the reimbursement process. Any entity processing claims must handle PHI in compliance with HIPAA privacy rules.
COBRA applies only to LLCs with 20 or more employees. Terminated employees must be offered the option to continue their Section 105 plan participation for a period after leaving, and the employer may charge up to 102% of the allowance value.
The ACA requires Section 105 plans to cover preventive care without cost-sharing and to extend dependent coverage for children up to age 26. Employers must also pay the annual PCORI fee via Form 720 and provide 60 days’ advance notice before making material modifications to the plan.
Types of Section 105 Plans Available to LLCs
Not all Section 105 plans are the same. The most common types include:
- QSEHRA (Qualified Small Employer HRA) — limited to businesses with fewer than 50 full-time equivalent employees; contribution caps of $6,450 for individuals and $13,100 for families in 2026; cannot be offered alongside group health insurance
- ICHRA (Individual Coverage HRA) — no business size restriction; no contribution cap; employees must have individual health insurance to participate; can be offered alongside group insurance but employees cannot choose between the two
- Integrated HRA (GCHRA) — must be offered with a group health plan; cannot reimburse individual insurance premiums; no contribution cap
- EBHRA (Excepted Benefit HRA) — can be offered alongside group insurance; limited scope of eligible expenses
- Medical Expense Reimbursement Plan (MERP) — a broader Section 105 plan that can reimburse any IRS Publication 502 expense
| Feature | QSEHRA | ICHRA |
|---|---|---|
| Business size limit | Fewer than 50 FTEs | None |
| Contribution cap | $6,450 individual / $13,100 family (2026) | No cap |
| Requires individual insurance | No | Yes |
| Can pair with group plan | No | Yes, with restrictions |
Comparing Section 105 Plans to Other Health Benefits
LLC owners often wonder whether a Section 105 plan is better than an HSA or a traditional group plan. The right choice depends on the LLC’s size, tax classification, and budget.
An HSA is owned by the employee, and funds roll over indefinitely. A Section 105 plan is owned by the employer, and unused funds stay with the business. An HSA requires a high-deductible health plan (HDHP), while a Section 105 plan does not.
A group health insurance plan involves paying premiums to an insurance carrier, with yearly rate increases that are out of the employer’s control. A Section 105 plan allows the employer to set a fixed allowance, giving complete budget control. The employer avoids the profit margin built into insurer premiums.
| Feature | Section 105 Plan | HSA |
|---|---|---|
| Who owns the funds | Employer | Employee |
| Requires HDHP | No | Yes |
| Unused funds | Stay with employer | Roll over with employee |
| Tax-free reimbursements | Yes, for eligible employees | Yes, for account holder |
Pros and Cons of a Section 105 Plan for LLCs
| Pros | Cons |
|---|---|
| Reimbursements are tax-free for eligible employees, reducing payroll tax and income tax burdens | LLC owners taxed as sole proprietors, partnerships, or S-corps cannot directly participate |
| Employer deducts all reimbursements as a business expense | Plan must comply with ERISA, HIPAA, ACA, COBRA, and IRS nondiscrimination rules |
| No contribution caps with ICHRA or integrated HRA options | Employees and owners may be unfamiliar with how the plan works |
| Employer controls budget by setting fixed allowances each year | Spouse-employee workaround requires genuine employment and a clear paper trail |
| Unused employee allowances stay with the business, not the employee | Failing nondiscrimination testing makes benefits taxable for highly compensated individuals |
| Can be offered alongside group insurance depending on the HRA type | A written plan document must be created and maintained for at least ten years |
Mistakes That Cost LLC Owners the Deduction
Paying Medical Bills From a Joint Account
The IRS expects the employee-spouse to pay from their own account. Paying from a joint checking account blurs the paper trail and can lead to the deduction being disallowed in an audit.
Failing to Create a Written Plan Document
There is no IRS form to file to establish a Section 105 plan. The employer creates the plan document internally. But skipping this step is fatal. Without a written document in place before expenses are incurred, the plan does not legally exist and reimbursements are not deductible.
Reimbursing Expenses Before the Plan Start Date
A Section 105 plan cannot reimburse a medical expense that was incurred before the plan existed or before the employee enrolled. Backdating a plan to cover earlier expenses violates IRS rules.
Double-Dipping on Pre-Tax Premiums
If the employee-spouse already pays health insurance premiums with pre-tax dollars through another employer’s plan, reimbursing those same premiums through a Section 105 plan is taxable double-dipping. Only expenses paid with after-tax dollars qualify for tax-free reimbursement.
Ignoring Attribution Rules for S-Corp LLCs
Ownership attribution rules mean that a spouse, child, parent, or grandchild of a >2% S-corp owner is treated as an owner for Section 105 purposes. The spouse-employee workaround does not work for S-corp LLCs. Ignoring this rule leads to unexpected tax bills.
Not Justifying the Spouse’s Work Hours
No minimum hours are required, but there must be a reasonable relationship between the spouse’s work and the reimbursement amount. If the IRS finds that the spouse performed little to no real work, the entire deduction is at risk.
Do’s and Don’ts for LLC Section 105 Plans
| Do | Don’t |
|---|---|
| Do create a written plan document before any expenses are incurred | Don’t backdate the plan to cover past medical bills |
| Do reimburse the employee-spouse from the business account | Don’t pay medical bills from a joint personal account |
| Do keep a written employment agreement for the spouse-employee | Don’t claim the workaround without the spouse doing real work |
| Do retain all receipts and reimbursement records for ten years | Don’t skip documentation — the IRS audits these plans |
| Do check your LLC’s tax classification before setting up the plan | Don’t assume all LLCs have the same Section 105 eligibility |
| Do run nondiscrimination tests if you have non-owner employees | Don’t offer better benefits to owners than rank-and-file workers |
How to Set Up a Section 105 Plan for Your LLC
Setting up the plan requires a few specific steps. You do not file any paperwork with the IRS, but you must keep the plan document available for a potential audit.
- Choose your HRA type. Decide whether a QSEHRA, ICHRA, integrated HRA, or MERP fits your LLC’s size and needs.
- Draft a written plan document. This document must outline eligible expenses, the reimbursement allowance, the plan’s effective date, and eligibility terms. Consider having an attorney review it.
- Establish the employee relationship. For sole proprietorship or partnership LLCs, create a written employment agreement for the spouse-employee, specifying duties, hours, and compensation structure.
- Set the allowance amount. Decide how much the LLC will make available for reimbursement per employee per year. QSEHRA plans have federal caps; ICHRA plans do not.
- Collect and verify expense documentation. Employees submit receipts or proof of insurance premiums paid. The employer verifies eligibility before issuing reimbursement.
- Issue reimbursements from the business account. The business pays the employee directly. Record the expense on the appropriate tax form (Schedule C, Line 14 for sole proprietorships; corporate return for C-corps).
- Prepare compliance documents. Draft the ERISA summary plan description, ensure HIPAA procedures are in place, and check whether COBRA or ACA requirements apply to your LLC.
FAQs
Can a single-member LLC have a Section 105 plan?
Yes. The LLC can offer the plan to W-2 employees. The owner cannot receive tax-free benefits directly but can use the spouse-employee workaround to gain coverage as a dependent.
Can an LLC owner participate in their own Section 105 plan?
Yes, if the LLC is taxed as a C-corporation. C-corp owner-employees qualify for full tax-free reimbursements. Owners of LLCs taxed as sole proprietorships, partnerships, or S-corps cannot participate directly.
Does a Section 105 plan replace health insurance?
No. A Section 105 plan reimburses medical expenses and insurance premiums. It is not an insurance policy and does not provide direct medical coverage.
Can both spouses be on a Section 105 plan if they co-own the LLC?
No. If both spouses are partners or members of the LLC, neither qualifies as a W-2 employee. The spouse-employee strategy requires that only one spouse be an owner.
Is there a maximum reimbursement amount for a Section 105 plan?
Yes and no. QSEHRA plans have annual federal caps ($6,450/$13,100 in 2026). ICHRA plans and traditional Section 105 MERPs have no federal reimbursement limit.
Do I need to file a Section 105 plan with the IRS?
No. There is no IRS filing requirement. The employer creates and maintains the written plan document internally and keeps it available in case of an audit.
Can an S-corp LLC use the spouse-employee workaround?
No. Attribution rules treat the spouse of a >2% S-corp owner as an owner. This makes the spouse ineligible for tax-free Section 105 benefits.
Can a Section 105 plan reimburse dental and vision expenses?
Yes. Any expense listed in IRS Publication 502 qualifies, including dental care, vision care, prescription drugs, co-pays, and deductibles.
What happens if my Section 105 plan fails nondiscrimination testing?
Yes, there are consequences. All discriminatory benefits become taxable income for highly compensated individuals, and the employer loses the FICA/FUTA tax savings on those amounts.
Can I have a Section 105 plan and an HSA at the same time?
Yes. Special rules apply to which expenses can be reimbursed when both are in place. Typically, the Section 105 plan is limited to certain expenses to preserve HSA eligibility.
Related reading
- Can You Really Deduct Health Insurance Premiums As An LLC Owner? Yes – But Avoid This Mistake + FAQs
- Can An LLC Really Use Section 179? Yes – But Don’t Make This Mistake + FAQs
- How Does a Section 105 Plan Work? (w/Examples) + FAQs
- Can a Sole Proprietor Have a Section 105 Plan? (w/Examples) + FAQs
- Can I Set Up a Section 105 Plan for Myself? (w/Examples) + FAQs
- Can a Partnership Have a Section 105 Plan? (w/Examples) + FAQs
- Is Section 105 Reimbursement Taxable Income? (w/Examples) + FAQs