The solution to your health insurance problems can be very simple and can give you an IRS-approved tax break. The strategy also can generate several additional tax advantages.
This solution, which I have recommended for years, is to hire your spouse to work in your business. As part of the business’s benefit plans, you offer family health and medical coverage for all full-time employees. Your spouse automatically is covered by the policy, and you are covered as a spouse of the employee.
In addition to being covered by health insurance, that coverage is tax-deductible by the business. Even better, you probably are able to join a trade association or business cooperative that offers group health insurance plans to members. That means you are able to get the insurance coverage at a lower rate than if you purchased an individual policy.
This strategy is particularly important to those with unincorporated businesses. Those owners could not deduct any of their own health insurance until a few years ago and won’t get full deductibility until 2002.
Even after 2002 there will be benefits to hiring your spouse. The business can set up a tax-deferred medical reimbursement plan under Section 105 that will allow pre-tax payments to cover deductibles and co-payments not paid under the insurance. Hiring your spouse also reduces the net income of the business, and that reduces the self-employment taxes of the owner, if the business is unincorporated. You also will be able to sock away more money for retirement through company-sponsored retirement plans and 401(k) plans for your spouse.
For this strategy to work, your spouse must be a bona fide employee of a genuine business. Your spouse must do real work for which the salary (including benefits) is reasonable. And the business must be one in which you make a profit or are genuinely trying to make a profit.
There are a few situations in which the strategy won’t work. If you have an S corporation, your spouse will be considered an owner by attribution. A partner in a partnership or someone owning more than 2% of an S corporation is treated as self-employed for fringe benefit purposes. In addition, if the spouse has contributed capital to the business or participates in management decisions, the IRS might conclude that the spouse is a co-owner. Then your spouse’s health insurance premiums will be treated the same as your own premiums.
If you have a small business, hiring your spouse can be a good way to get tax deductible medical coverage for yourself and add other tax benefits.