Yes, an S corporation owner can use a Section 105 plan — but the tax benefits look different for any shareholder who owns more than 2% of the company. Under IRC §1372, the IRS treats every 2%+ S corp shareholder-employee like a self-employed partner, not a regular W-2 employee, for fringe benefit purposes. This single rule blocks the tax-free treatment that makes Section 105 plans so powerful for everyone else. The potential excise tax for getting this wrong is $100 per day per employee under IRC §4980D — that adds up to $36,500 per person, per year.
Here’s what you’ll learn:
- 📋 What a Section 105 plan is and why S corp owners get treated differently than regular employees
- 💰 The exact tax treatment of health reimbursements for 2%+ shareholders, including W-2 reporting and FICA rules
- ⚖️ How to compare Section 105 plan types — ICHRA, QSEHRA, and MERP — and which ones S corp owners can and cannot use
- 🚫 Costly mistakes that trigger IRS penalties and how to avoid them
- ✅ Step-by-step setup instructions, do’s and don’ts, pros and cons, and real-world scenarios with examples
What a Section 105 Plan Actually Does
A Section 105 plan is an IRS-approved employer health benefit that reimburses employees for medical expenses and health insurance premiums tax-free. The plan gets its name from Section 105 of the Internal Revenue Code, which allows certain payments from accident and health plans to be excluded from an employee’s gross income. For a regular W-2 employee, these reimbursements never show up as taxable wages.
The employer sets up a formal written plan, chooses how much to reimburse each employee per month or year, and then pays employees back after they submit proof of eligible medical expenses. The employer gets a full business deduction. The employee pays zero income tax, zero FICA, and zero FUTA on the reimbursement.
How the Money Flows
The mechanics are straightforward. An employee pays for a medical expense — like a doctor visit, prescription, or insurance premium. The employee submits a receipt or explanation of benefits to the employer or a third-party administrator. The employer then reimburses the employee up to the allowance cap in the plan document.
No insurance company sits in the middle. The employer self-funds the benefit directly. This is why Section 105 plans are sometimes called self-insured or self-funded health plans.
Types of Section 105 Plans Worth Knowing
Several different arrangements qualify under Section 105 of the Internal Revenue Code. Each one has different rules about who can participate, how much can be reimbursed, and what expenses are covered.
| Plan Type | What It Does |
|---|---|
| Health Reimbursement Arrangement (HRA) | Employer reimburses employees for medical expenses and/or insurance premiums up to a set allowance |
| Qualified Small Employer HRA (QSEHRA) | Standalone HRA for employers with fewer than 50 employees; has annual dollar caps set by the IRS |
| Individual Coverage HRA (ICHRA) | HRA that reimburses employees for individual health insurance premiums; no dollar cap; no employer size restriction |
| Medical Expense Reimbursement Plan (MERP) | Broad reimbursement plan for medical costs defined under IRC §213(d) |
| Flexible Spending Account (FSA) | Employee sets aside pre-tax dollars for medical expenses; funded through salary reduction |
| Group Coverage HRA (GCHRA) | HRA paired with a group health insurance plan to cover deductibles and copays |
The QSEHRA and ICHRA are the two most common standalone options for small businesses today. The GCHRA works alongside a traditional group plan. The FSA operates through salary reduction, which creates a critical distinction for S corp owners.
Why S Corp Owners Hit a Tax Wall
Here is where things get complicated for S corporation shareholders. IRC §1372 says that for purposes of applying the fringe benefit rules, an S corporation must treat any 2%+ shareholder-employee the same way a partnership treats a partner. This is not optional. It applies automatically by operation of law.
Because partners are considered self-employed, they cannot receive tax-free benefits under IRC §105(b) or §106. Revenue Ruling 91-26 confirmed this rule: health insurance premiums paid for a 2%+ S corp shareholder are not excluded from gross income the way they would be for a regular employee. The reimbursements must be added to the shareholder’s W-2 as taxable wages.
This does not mean the S corp owner gets zero benefit. It means the benefit takes a different path through the tax code — one with more steps and more limitations.
Who Counts as a “2% Shareholder”
A 2% shareholder is anyone who owns more than 2% of the outstanding stock — or more than 2% of the total combined voting power — on any single day during the tax year. Even if you sell your shares on January 2, you are a 2% shareholder for the entire year because you held the stock on January 1.
Family Attribution Makes This Broader Than You Think
The IRS does not just look at the shares in your name. Under the family attribution rules, you are treated as owning the stock held by your spouse, children, grandchildren, and parents. A person who owns zero shares personally can still be a 2% shareholder through family ownership.
Example: Justin works at Flagco and owns no stock. His father Jerry owns 75% of the company. The IRS treats Justin as a 2% shareholder because he is deemed to own his father’s 75% stake. Justin cannot receive tax-free Section 105 benefits.
How Health Reimbursements Show Up on Your W-2
When an S corporation pays health insurance premiums or reimburses medical expenses for a 2%+ shareholder-employee, the company must report those amounts as wages in Box 1 of the shareholder’s Form W-2. The amount is subject to federal income tax withholding.
There is one piece of good news in the reporting rules. These additional wages are not subject to Social Security tax (FICA) or federal unemployment tax (FUTA) — as long as the payments are made under a plan or system that covers all employees or a class of employees. This means the premiums appear in Box 1 but do not appear in Box 3 (Social Security wages) or Box 5 (Medicare wages).
The S Corporation’s Deduction
The S corporation itself can fully deduct the cost of premiums paid for 2% shareholders on Form 1120-S. The deduction goes on either Line 7 (Compensation of officers) or Line 8 (Salaries and wages). This reduces net income, which flows through to all shareholders on Schedule K-1 proportionally. The deduction cannot be specially allocated to just the shareholder who receives the W-2 income.
The Above-the-Line Deduction That Offsets the Damage
The 2%+ shareholder gets a critical tax break of their own: the self-employed health insurance deduction under IRC §162(l). This is an above-the-line deduction, meaning it reduces your adjusted gross income (AGI) directly on Form 1040, Schedule 1. You do not need to itemize to claim it.
100% of the health insurance premiums included in your W-2 can be deducted — but two limitations apply:
| Limitation | What It Means |
|---|---|
| Earned income cap | The deduction cannot exceed your W-2 wages (earned income) from the S corporation that provides the plan |
| Subsidized plan rule | If you or your spouse were eligible to participate in any employer-subsidized health plan during a month, you cannot deduct premiums for that month |
Example: Jerry is a 2% shareholder of Flagco. The company paid $8,000 in health premiums on his behalf, but Jerry only earned $6,000 in cash wages. His W-2 shows $14,000 in Box 1 ($6,000 wages + $8,000 premiums) but only $6,000 in Box 3. Jerry’s above-the-line deduction is capped at $6,000. The remaining $2,000 can only be deducted on Schedule A, subject to the AGI floor.
Example: Justin is a 2% shareholder. His wife Jane was eligible for her employer’s health plan for the last six months of the year, even though she declined coverage. Justin cannot deduct his premiums for those six months. It does not matter that Jane chose not to enroll.
Three Scenarios Every S Corp Owner Needs to See
Scenario 1: Sole Shareholder-Employee With No Other Workers
Meet Rachel. She owns 100% of her S corp and is the only employee. She wants to set up a Section 105 plan to reimburse herself for health insurance premiums and out-of-pocket medical costs.
| What Rachel Does | What Happens |
|---|---|
| Sets up a Section 105 plan and reimburses herself $10,000 for health premiums | The $10,000 is added to her W-2 Box 1 as taxable income |
| Reports the $10,000 on her Form 1040 | She claims the IRC §162(l) above-the-line deduction for $10,000, reducing her AGI |
| Has no other employees on the plan | The ACA market reform rules do not apply because the plan covers fewer than two current employees |
| The S corp deducts $10,000 on Form 1120-S | Reduces passthrough income on Rachel’s Schedule K-1 |
Rachel does not get the tax-free treatment a C corp owner or regular employee would receive. But she avoids FICA on the reimbursements and offsets the income with the above-the-line deduction. The net tax impact is close to zero on the premiums — though she misses the FICA savings that true tax-free treatment provides on out-of-pocket medical expenses.
Scenario 2: S Corp Owner With Non-Shareholder Employees
Meet David. He owns 60% of his S corp and employs five non-shareholder W-2 workers. He wants to offer a Section 105 plan to everyone.
| What David Does | What Happens |
|---|---|
| Sets up an ICHRA for all employees, including himself | The five non-shareholder employees receive reimbursements tax-free — no income tax, no FICA, no FUTA |
| David’s own reimbursements are added to his W-2 Box 1 | David pays income tax on the reimbursements, then claims the §162(l) deduction on his 1040 |
| David’s plan covers more than two current employees | The plan must comply with ACA market reform requirements, or the S corp faces the $100/day §4980D penalty for non-shareholder employees |
| The S corp deducts all reimbursements as a business expense | Reduces taxable income for the company |
David must be careful. The IRS treats his reimbursement arrangement and the employees’ arrangement as a single group health plan. If the plan fails ACA compliance, penalties apply to the non-shareholder employees — not David.
Scenario 3: S Corp Owner’s Spouse on Payroll
Meet Carlos. He owns 100% of his S corp. His wife Maria works part-time doing bookkeeping and is a legitimate W-2 employee. Carlos wants Maria to receive Section 105 benefits.
| What Carlos Does | What Happens |
|---|---|
| Employs Maria as a bona fide W-2 employee | Maria is treated as a 2% shareholder through family attribution — she is deemed to own Carlos’s 100% stake |
| Sets up a Section 105 plan covering Maria | Maria’s reimbursements are added to her W-2 as taxable income, just like Carlos |
| Both are covered under a family plan | The plan covers only family members under one plan — this qualifies for the “fewer than two participants” exception to ACA market reforms |
| Maria’s W-2 income must reflect reasonable compensation | The IRS will scrutinize whether Maria’s total compensation (wages + benefits) is reasonable for her actual work |
Carlos cannot use spousal employment the way a sole proprietor can. In a sole proprietorship, employing a spouse allows fully tax-free Section 105 reimbursements. In an S corp, the family attribution rules kill that advantage.
S Corp vs. Other Business Structures Under Section 105
The business entity you choose has a massive impact on Section 105 benefits. Here is how each structure treats the owner:
| Entity Type | Owner’s Section 105 Tax Treatment |
|---|---|
| C Corporation | Owner-employee receives fully tax-free reimbursements; the C corp deducts the cost as a business expense |
| S Corporation (2%+ shareholder) | Reimbursements are taxable W-2 income; shareholder claims the above-the-line deduction under §162(l) |
| S Corporation (<2% shareholder) | Treated like a regular employee — reimbursements are tax-free |
| Partnership | Partner cannot participate directly; must use spousal employment to access benefits |
| Sole Proprietorship | Owner cannot participate directly; must employ a spouse who is active in the business |
| LLC | Depends on tax election — taxed as a partnership, S corp, C corp, or sole proprietorship; same rules apply based on election |
The C corporation gives the owner the best Section 105 outcome. The S corporation offers a partial benefit. Partnerships and sole proprietorships require a spousal workaround.
ICHRA, QSEHRA, or MERP — Which One Can You Use?
Not every Section 105 plan type works for every S corp owner. The QSEHRA specifically excludes 2% shareholder-employees from participation. The ICHRA and MERP allow participation, but with the modified tax treatment described above.
| Feature | Impact on 2%+ S Corp Shareholders |
|---|---|
| QSEHRA | 2%+ shareholder-employees cannot participate at all per IRC §1372 and Notice 2017-67, Question 9 |
| ICHRA | 2%+ shareholders can participate but reimbursements are taxable W-2 income, not tax-free |
| MERP | 2%+ shareholders can participate under the same modified tax rules as ICHRA |
| FSA (Section 125 Cafeteria Plan) | 2%+ shareholders are completely excluded — they cannot participate in any Section 125 plan |
For 2026, QSEHRA annual reimbursement limits are $6,450 for self-only coverage and $13,100 for family coverage. These limits apply to eligible employees only — the 2%+ shareholder-employee cannot use them at all.
If you are a 2%+ S corp shareholder and your company has fewer than 50 employees, you can still set up a QSEHRA for your non-shareholder staff. You just cannot participate in it yourself. You would take the self-employed health insurance deduction on your personal return instead.
ACA Penalties That Can Destroy Your Savings
The Affordable Care Act added a dangerous excise tax under IRC §4980D. If your Section 105 plan fails to meet ACA market reform requirements, the penalty is $100 per day for each affected employee. Over a full year, that is $36,500 per employee.
The most common violation occurs when an S corp reimburses employees for individual health insurance premiums through an informal arrangement — sometimes called an employer payment plan. The IRS ruled in Notice 2013-54 that these arrangements fail the ACA’s ban on annual limits for essential health benefits. The reimbursement amount acts as a cap, which triggers the penalty.
When the Penalty Does Not Apply
Two situations protect your S corporation from the §4980D excise tax:
- Your plan complies with ACA market reforms. A properly structured ICHRA or QSEHRA satisfies these requirements. Traditional group health plans also comply.
- Fewer than two current employees participate. The ACA market reform rules do not apply to plans with fewer than two participants who are current employees. If you are the sole employee, or only family members are covered under one plan, you fall within this safe harbor.
Notice 2015-17 Gives 2% Shareholders Breathing Room
The IRS issued Notice 2015-17 to provide transition relief specifically for S corporations with 2% shareholder-employee healthcare arrangements. Under this notice, the IRS will not assert the §4980D excise tax against a 2% shareholder-employee healthcare arrangement. The S corporation also does not need to file Form 8928 solely because it has a 2% shareholder arrangement. This relief remains in effect until further guidance is issued.
Critical warning: This relief applies only to the 2% shareholder portion of the arrangement. If the same plan also covers non-shareholder employees, the non-shareholder portion must still comply with ACA market reforms or face full penalties.
Step-by-Step: Setting Up a Section 105 Plan in Your S Corp
Setting up a Section 105 plan requires a formal process. Skipping steps can cost you the tax deduction entirely.
Step 1: Choose the plan type. Decide whether you want an ICHRA, MERP, GCHRA, or another qualifying arrangement. If you have non-shareholder employees, an ICHRA or QSEHRA (for them) often works best.
Step 2: Draft a formal written plan document. The IRS requires written plan documents that define eligible expenses, allowance amounts, the plan year, eligibility rules, and other terms. Without a written document, the IRS can deny the deduction entirely.
Step 3: Set monthly or annual allowances. Decide how much the S corporation will reimburse each participant. Different amounts can be set for different employee classes (under ICHRA). The allowance must reflect reasonable compensation.
Step 4: Communicate the plan to participants. ERISA requires a Summary Plan Description (SPD) furnished to every participant. For a QSEHRA covering non-shareholder employees, a written notice must go out at least 90 days before the plan year begins.
Step 5: Collect expense documentation. Employees must submit receipts, invoices, or explanations of benefits proving they incurred an eligible medical expense. The IRS requires this documentation to be kept on file for ten years.
Step 6: Reimburse and report correctly. Pay the reimbursement to the employee. For 2%+ shareholders, add the amount to W-2 Box 1. Ensure it is excluded from Boxes 3 and 5. For regular employees, the reimbursement stays off the W-2 entirely.
Step 7: Ensure the S corp pays or reimburses directly. Under IRS Notice 2008-1, the S corporation must either pay the insurance premiums directly, or reimburse the shareholder and include the amount on the shareholder’s W-2. If the shareholder pays out of pocket and the S corp does nothing, no above-the-line deduction is allowed.
Step 8: File required forms. Pay the annual PCORI fee via Form 720. Comply with COBRA rules if you have 20+ employees. Provide 60-day advance notice for any material plan changes.
Mistakes That Trigger IRS Scrutiny
Failing to Include Premiums on the W-2
The most common error is paying premiums for a 2%+ shareholder but not reporting the amount on their W-2. The IRS specifically requires Box 1 inclusion. If you skip this step, the shareholder loses the above-the-line deduction entirely, and the S corp may face penalties for incorrect wage reporting.
Letting the Shareholder Pay Without Corporate Involvement
If the shareholder pays for health insurance out of personal funds and the S corporation never reimburses or reports the payment, the shareholder cannot claim the self-employed health insurance deduction. The IRS requires the S corporation to be involved — either by paying directly or by reimbursing and including the amount on the W-2.
Operating Without a Written Plan Document
An informal verbal agreement does not qualify. The IRS requires a formal written plan that spells out eligible expenses, coverage terms, and allowance amounts. Without this document, every reimbursement becomes taxable compensation with no offsetting structure.
Mixing Shareholder and Employee Arrangements Incorrectly
If your S corporation has a single reimbursement plan covering both 2% shareholders and non-shareholder employees, the entire arrangement is treated as one group health plan. A violation affecting the non-shareholder employees triggers §4980D penalties even if the shareholder portion has transition relief. The safest approach is maintaining separate arrangements.
Ignoring the Earned Income Limitation
Your above-the-line deduction cannot exceed your earned income (W-2 wages) from the S corporation that provides the health plan. Schedule K-1 passthrough income does not count. Wages from a different employer do not count. If your wages are too low, part of your deduction is lost.
Participating in a QSEHRA or FSA as a 2%+ Shareholder
A 2%+ S corp shareholder is excluded from QSEHRAs and from Section 125 cafeteria plans (which include FSAs). Enrolling in either one creates a compliance violation.
Do’s and Don’ts for S Corp Owners Using Section 105
| Do | Why |
|---|---|
| Do have the S corp pay premiums directly or reimburse you | Required under Notice 2008-1 to qualify for the above-the-line deduction |
| Do include reimbursements in W-2 Box 1 | Without W-2 reporting, you lose the IRC §162(l) deduction |
| Do exclude shareholder reimbursements from W-2 Boxes 3 and 5 | Premiums paid under a plan for employees are exempt from FICA and FUTA |
| Do maintain a written plan document | The IRS requires formal documentation; no document means no deduction |
| Do keep expense receipts for ten years | IRS substantiation rules require long-term record retention |
| Do set reasonable compensation that accounts for benefits | Total compensation (wages + benefits) must be reasonable for the work performed |
| Do use separate arrangements for shareholders and non-shareholder employees | Protects non-shareholder employees from §4980D penalties tied to the shareholder arrangement |
| Don’t | Why |
|---|---|
| Don’t enroll in a QSEHRA as a 2%+ shareholder | You are excluded by IRC §1372 and Notice 2017-67 |
| Don’t participate in a Section 125 cafeteria plan or FSA | 2%+ shareholders are not considered employees for Section 125 purposes |
| Don’t pay premiums personally without S corp reimbursement | You lose the right to the above-the-line deduction |
| Don’t skip W-2 reporting and hope the IRS won’t notice | Audit triggers include mismatched deductions and unreported fringe benefits |
| Don’t assume spousal employment works the same as in a sole proprietorship | Family attribution rules make your spouse a 2% shareholder too |
| Don’t ignore ACA compliance for non-shareholder employees | Transition relief under Notice 2015-17 only protects the shareholder portion |
Pros and Cons of Section 105 Plans for S Corp Owners
| Pros | Cons |
|---|---|
| The S corp gets a full business deduction for premiums paid | Reimbursements are taxable income on the 2%+ shareholder’s W-2 |
| Reimbursements are exempt from FICA and FUTA when paid under a qualified plan | The above-the-line deduction is capped at your W-2 earned income from the S corp |
| The above-the-line deduction under §162(l) offsets most of the taxable income | 2%+ shareholders cannot participate in QSEHRAs or FSAs |
| Non-shareholder employees still receive fully tax-free benefits | The S corp owner’s net tax savings are smaller than those of a C corp owner |
| Setup is straightforward with a third-party administrator | ACA compliance adds complexity and penalty risk for plans covering multiple employees |
| Flexible plan design — choose which expenses to reimburse and set your own caps | Family attribution rules extend the 2% shareholder treatment to spouses, children, and parents working at the company |
| The plan reduces the S corp’s passthrough income on Schedule K-1 | The K-1 deduction flows to all shareholders proportionally, not just the one receiving benefits |
Court Rulings and IRS Guidance That Built These Rules
Several key rulings and notices shape how Section 105 plans interact with S corporation taxation.
Revenue Ruling 91-26 (1991). This ruling confirmed that health insurance premiums paid for a 2%+ S corp shareholder are not excludable from gross income under IRC §106. The ruling applied IRC §1372’s partnership treatment to close any argument that S corp shareholders could receive tax-free health benefits.
Notice 2008-1. The IRS clarified four scenarios for how the health insurance deduction works when the policy is purchased in the shareholder’s name versus the corporation’s name. The bottom line: the S corp must pay or reimburse, and the premiums must appear on the shareholder’s W-2.
Notice 2013-54. The IRS declared that employer payment plans — where employers simply reimburse individual health premiums — violate the ACA’s ban on annual limits for essential health benefits. This notice triggered the §4980D penalty risk for informal reimbursement arrangements.
Notice 2015-17. Provided transition relief specifically for 2% shareholder-employee healthcare arrangements. The IRS committed to not asserting §4980D penalties against these arrangements until further guidance is issued. This relief remains active as of 2026.
Notice 2017-67. Issued 79 questions and answers about QSEHRAs. Question 9 confirmed that 2% S corp shareholder-employees cannot participate in a QSEHRA.
David E. Watson, PC vs. U.S. (8th Cir. 2012). While not directly about Section 105, this case reinforced the IRS’s authority to reclassify payments to S corp shareholder-employees as wages subject to employment taxes. It underscores the importance of reasonable compensation when structuring any benefit arrangement.
State-Level Rules That Add Hidden Costs
Federal rules create the foundation, but states add their own layers.
California does not recognize S corporation status the same way the federal government does. California imposes a 1.5% franchise tax on S corporation net income, and the state has its own rules about health benefit deductions. A Section 105 deduction that works on your federal return may need separate treatment on your California return.
States with no income tax — including Texas, Florida, Wyoming, Nevada, Washington, South Dakota, and Alaska — simplify the picture. The above-the-line deduction matters only at the federal level in these states. However, FICA and FUTA are federal taxes, so the exemption from payroll taxes applies everywhere.
New York conforms to most federal health benefit deductions but has its own employer health insurance regulations that may affect plan design. Some states also require specific insurance coverage mandates that apply to group health plans — including self-funded Section 105 plans.
Always check your state’s treatment of S corporation income, health benefit deductions, and any state-level group health plan requirements before setting up your plan.
FAQs
Can a 2% S corp shareholder participate in a Section 105 plan?
Yes. They can participate, but reimbursements are taxable W-2 income — not tax-free. The shareholder can claim the self-employed health insurance deduction on Form 1040 to offset the income.
Can a 2% S corp shareholder use a QSEHRA?
No. IRC §1372 and Notice 2017-67, Question 9, specifically exclude 2% shareholder-employees from QSEHRA participation. Non-shareholder employees at the same company can still use it.
Can a 2% S corp shareholder use an ICHRA?
Yes. A 2% shareholder can participate in an ICHRA, but the reimbursements are added to their W-2 as taxable wages instead of being tax-free.
Can a 2% S corp shareholder use a Section 125 cafeteria plan or FSA?
No. Under IRC §1372, a 2% shareholder is not treated as an employee for Section 125 purposes and cannot participate in any cafeteria plan or FSA.
Are Section 105 reimbursements for 2% shareholders subject to FICA?
No. Premiums paid under a plan covering employees or a class of employees are exempt from FICA and FUTA taxes. They appear in W-2 Box 1 but not Boxes 3 or 5.
Does Schedule K-1 income count toward the earned income limit for the deduction?
No. Only W-2 wages from the S corporation providing the health plan count. K-1 passthrough income and wages from other employers do not increase the deduction cap.
Can my spouse get tax-free Section 105 benefits through my S corp?
No. Family attribution rules treat your spouse as a 2% shareholder. Their reimbursements are taxable W-2 income, not tax-free.
Does my S corp need a written plan document?
Yes. The IRS requires a formal written plan describing eligible expenses, allowance amounts, and plan terms. Without one, all reimbursements become ordinary taxable wages with no structural benefit.
Can I set up a Section 105 plan if I am the only employee?
Yes. A sole shareholder-employee can establish a Section 105 plan. The ACA market reform rules do not apply because the plan covers fewer than two current employees.
What happens if I pay my own premiums and the S corp does not reimburse me?
No above-the-line deduction is available. IRS Notice 2008-1 requires the S corporation to either pay the premiums directly or reimburse the shareholder and include the amount on the shareholder’s W-2.
Can I deduct out-of-pocket medical expenses through a Section 105 plan?
Yes. Medical expenses defined under IRC §213(d) — including doctor visits, prescriptions, dental, and vision — are eligible for reimbursement, but the reimbursement is taxable income on the 2%+ shareholder’s W-2.
Is a Section 105 plan better than just taking the self-employed health insurance deduction without a plan?
No significant difference exists for premiums alone. Both routes give you the §162(l) deduction. A Section 105 plan adds value by creating a formal structure for reimbursing out-of-pocket medical expenses and providing tax-free benefits to non-shareholder employees.
What is the penalty for an ACA-noncompliant Section 105 plan?
Yes, there is a penalty. IRC §4980D imposes $100 per day per affected employee. That equals $36,500 per employee per year. Notice 2015-17 provides transition relief only for the 2% shareholder portion.
Can I have a Section 105 plan and an HSA at the same time?
Yes. Special rules apply. If the Section 105 plan can reimburse any medical expense, it disqualifies HSA eligibility. The plan must be limited to premiums, dental, vision, preventive care, or long-term care to preserve HSA compatibility.
Does an S corp with fewer than 50 employees need to offer health insurance?
No. The ACA employer shared responsibility provisions only apply to applicable large employers with 50 or more full-time employees. Smaller S corps can choose to offer a Section 105 plan voluntarily.
Related reading
- Can an ESOP Be an S Corp Shareholder? (w/Examples) + 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 Deduct Section 105 Reimbursements? (w/Examples) + FAQs
- Can I Set Up a Section 105 Plan for Myself? (w/Examples) + FAQs
- Is S-Corp Owner Health Insurance Part of Reasonable Comp? (w/Examples) + FAQs
- Is Section 105 Reimbursement Taxable Income? (w/Examples) + FAQs