We are a husband and wife team set up as a two-person LLC taxed as a partnership. Will a Flexible Employee Benefit Plan or a Medical Expense Reimbursement Plan or a Health Reimbursement Arrangement work for us?by Tom Luker on 05/01/15
A two-person LLC, such as you have is usually taxed as a partnership, and partners can’t hire partners. Therefore, neither of you are an employee – you just OWN the shop!
- A famous IRS case coming down in 1971 as Revenue Ruling 71-588 was a partnership with one of the partners hiring his wife, who was not a partner.
- This landmark ruling established that as long as the spouse was a legitimate employee and all eligible employees were covered under an “accident and health plan” it was okay. The benefits also accrued to the husband who was “a member of the family” of the employee.
- The key here is that the wife was NOT a partner.
- If your business wants to continue in the partnership mode, and you want to use the advantages of a MERP/HRA, you might look into other business operations under which it might be used, if you have multiple enterprises going in your life.
- Finally, you might want to consider terminating the two-member LLC and re-establishing it as a single-member LLC, so you can file a simple Schedule C tax return instead of a Partnership return and then hire your spouse as the only employee, a great “no-brainer” MERP setup.
- As always, seek out counsel from your legal/tax professional before making such a move.
- If your LLC is being taxed as a C-Corp and both husband and wife are receiving a W-2 wage, then they can both be given fringe benefits.
- In a different blog/FAQ we’ll discuss what would be the situation if the LLC is being taxed as an S-Corp.
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