Author Topic: Solo 401k and medical reimbursement for self-employed hiring spouse  (Read 1214 times)

housedress

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Hi all,
I am new and this is my first post. While early retirement won't be possible since I am already 46 and behind the eight ball, I have always been frugal from necessity and my husband and I need to save aggressively in order to have financial security. We will have 100k in savings at the end of 2016 (SEP - self-employed) but the SEP limits are too low and I'm thinking my husband should open a solo 401k and officially hire me (I do plenty of work for his business) and provide me with a medical reimbursement plan (IRS section 205) in order to pay most of our medical pre-tax (especially since we have some costly medical bills coming up in 2017.)
I am wondering if anyone here has experience with either of these, or can point me in the right direction to past threads - my searches keep coming up empty.
Many thanks!

Goldielocks

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Re: Solo 401k and medical reimbursement for self-employed hiring spouse
« Reply #1 on: November 20, 2016, 10:39:52 PM »
Check out Joshua Sheet's radical personal finance podcast, he recently had a tax expert on talking about the "hire a spouse for medical benefits" and other interesting ideas for small business taxes.

Cpa Cat

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Re: Solo 401k and medical reimbursement for self-employed hiring spouse
« Reply #2 on: November 20, 2016, 11:19:10 PM »

I've collected a few IRS references on the subject:
TAM 9409006
Rev Rul 71-588
UIL 162.35-02
UIL 105.06-05

I haven't had time to go digging for tax court cases that fit the mold. It's on my agenda before the end of the year - I'll try to remember to update if I come up with anything interesting.

I think that spouse-only Section 105 plans are a "handle-with-care" item. Thus, I don't want to comment on the appropriateness or procedure for implementing one for your husband's company.

SeattleCPA

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Re: Solo 401k and medical reimbursement for self-employed hiring spouse
« Reply #3 on: November 28, 2016, 04:07:29 PM »
You can make a Sec. 105(b) (aka healthcare reimbursement arrangement) work... and you can use a solo 401(k) to bump up your tax-deferred savings at lower income levels. But I'm not sure I see an easy way to combine them so you get synergy.

We also don't have any detailed info on your situation's specifics...

That said, here's some stuff to ponder... with a solo 401(k), you can do both the 25% match and then also an elective deferral (so another $18K).

Example #1: With $100K in profits all treated as self employment income for your spouse, spouse could do a $20K "employer match" and then also an $18K elective deferral. That gets you to a $38K 401(k) contribution..

Example #2: With $100K in profits split between spouses (say $32K to one spouse as wages and $68K to other spouse as self-employment earnings), each spouse could do an $18K elective deferral... and then on the employed spouse, business could do an $8K 'employer match'... and then on the other spouse probably about a $12K 'employer match.' That puts you to roughly $56K. Roughly...

Bottomline: You can save a ton into your 401(k)s without having to fiddle with a Sec. 105(b) plan.

Note: I used $100K in income just to make the math easy. Most households make half that amount...

BTW you possibly can do a Sec. 105(b) plan and save income and payroll taxes via that gambit. But it doesn't really jack your 401(k).And if you're thinking that way, you might want to just look at the S corporation option since that'll let you save a ton of payroll taxes.