FAQ: MERPs and HRAs

By Tom Luker

TLC Plan Services, LLC - TLC/Tax Liaison Consultants


"We are a husband and wife team set up as a two-person LLC. Will a medical expense reimbursement plan or health reimbursement arrangement work for us?"

A two-person LLC is usually taxed as a partnership, and partners can't hire partners. A famous IRS case coming down in 1971 as Revenue Ruling 71-588 involved 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 ok. In addition, 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 another business operation under which it might be used, if you have multiple enterprises going in your life. Finally, you might want to consider terminating the 2-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.

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.

At a later date we'll discuss what would be the situation if the LLC is being taxed as an S-Corp.

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