We’re a family partnership, with my parents, brothers and sisters. Will a Medical Expense Reimbursement Plan or Health Reimbursement Arrangement work for us?by Tom Luker on 05/01/15
A business that is a partnership means that the PARTNERS ARE NOT EMPLOYEES and thus can NOT receive EMPLOYEE BENEFITS.
- 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 partnership and re-establishing it as a C-Corporation, thus making each stockholder also employees. All of these deliberations need to be made in consultation with your legal and tax professional advisers.
- Sometimes in multiple-family partnerships, financial gymnastics are necessary. We’ve helped several farm partnerships where several family members are partners.
- One was where the father and four sons were partners in a dairy operation. There were no daughters, and mom had not been previously been a “paid” EE.
- All 5 partners were working 60 plus hours per week. I explained the spousal employment route, but as we were sitting around the large dining room table, each son described his wife’s involvement in the business.
- Of the three oldest, two wives were already involved either full time or part time on the farm with one working in town. For those three plus Dad, spousal employment was no problem.
- I turned to the fourth son and asked, “How about you?” Mom spoke up and said, “He’s not married, but we’re trying to get him married!” Then she followed up with, “Can you fix him up with some woman in town who wants to come out to the country and live on a dairy farm?”
- I actually did fix him up with a blind date some months later, but nothing developed in the form of romance!
- In this case, when the MERP was established, their accountant arranged for their various “profit sharing” amounts at the end of the year to be altered based on the extent of each of their MERP tax-free benefits, from very large to nothing [in the case of the single brother].
- This type of accounting/financial “gymnastics” might also be used in any kind of a partnership or even a corporation.
- Elsewhere in our Blog/FAQ we discuss “compensation gymnastics.”
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