We’re a business with less than 10 eligible EEs. Why and how should we provide this MERP thing under Section 105, rather than using Section 125, and without increasing overhead?by Tom Luker on 05/01/15
First of all, do you need a MERP or HRA to deduct the cost of insurance?
- No, but you may not be able to afford the entire cost of your EEs health insurance.
- You might be sharing the cost of health insurance and wish to select a budgeted portion for categories of employees, which can be done with fully insured plans. This allows you to control your insurance costs, regardless of the future size of your company.
- You can also go another step, more fitted to a small company like yours, regarding “negotiated” wage changes for EEs which we’ll discuss in a later posting.
- Also, there’s a big reason why a small or micro-sized family owned business can’t effectively use Sec. 125, since those who are related to the owner are automatically classed as “highly compensated” EEs, sort of like the pension plan definitions, regardless of the actual income of those family owner/employees. Thus they can’t have more than 25% of total plan benefits, which can greatly decrease their use of Sec 125.
- Sec. 105 has no such rules, as the owners and relatives can have 100% of benefits. We helped a CPA on a case of a 155-EE wreath-making business in Northern Wisconsin with only the seven family/EE C-Corp stockholders being eligible for Sec 105 because they were the only EEs who worked more than seven months per year.
- A physical therapy firm that we helped had 13 EEs and was operating as a Schedule C business. The owner was the only male in the business, and his wife was already a full-time EE as receptionist. The referring CPA thought we should use Sec. 125 so that Dependent Care could be used by several of the employees.
- At the time of the EE orientation meeting, we explained that all the EE needs to do for the Dependent Care qualification is to give us an invoice [even hand-written] which includes the DC provider’s name and SS number.
- All three of the women who were looking forward to using the DC benefit came back and said none of the DC providers would sign or give out the info!
- Guess what, the DC providers were accepting their fees without reporting the income to the IRS! So, $15,000 of benefits [$5,000 x 3] were taken off the top of the plan. The owner and his wife were the only ones who had much medical costs [spouses of the other EEs had benefits in other employment] so the total of $33,000 potential plan usage went crashing to $18,000 and thus the owner's $8,000 was way over the new 25% limit of $4,500.
- Solution: We switched to a Sec. 105 plan immediately [since the owner’s brother was a CPA, it was fully understood what the difference was,] and the owner received 100% of the $8,000 need. Previously they were planning on giving the wife an $8,000 wage, and she was going to put it all into the Sec. 125 FSA plus insurance. Now she could be given any wage she wanted [maybe $100?] and given the rest in tax-free benefits.
- Another example was the Executive Director of the Chamber of Commerce/Visitor’s Bureau of a very popular county in vacation-land, being compensated over $100,000, thus meeting the normal “highly comp” definition. The staff were few, and many were part-time or seasonal. Therefore, Sec. 125 was not practical, and Sec. 105 fit in perfectly.
- Note: Some of the recommendations above may now have to be changed because of the many restrictions placed by PPACA.
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