How One C-Corp Saved $10,000 Using a Section 105 Plan

Small businesses often face rising healthcare costs with limited options for affordable coverage. Traditional group insurance can be expensive and inflexible. For one small business owner, a Section 105 medical reimbursement plan provided a powerful solution. By structuring the plan properly, the business saved over $10,000 in just one year—legally and efficiently.

The Business: A Family-Run C-Corporation

The business was a small C-corporation operated by a husband and wife team. They ran a consulting company with no outside employees. The husband was the primary consultant and corporate officer. The wife handled admin, scheduling, and back-office tasks.

They previously paid out-of-pocket for all medical expenses, including premiums, dental work, and prescriptions. These expenses were not deductible through the business. As healthcare costs rose, they searched for a better way.

Their tax advisor recommended a Section 105 medical reimbursement plan. It offered a way to deduct healthcare costs through the business. After reviewing the rules, they moved forward with implementation.

Setting Up the Section 105 Plan

The first step was creating a formal plan document. This document outlined eligible expenses, employee eligibility, and reimbursement procedures. Since the husband and wife were both C-corp employees, they were eligible to participate. The plan allowed reimbursements for themselves and their children.

They used a legal plan template tailored for small C-corps. They clearly defined the reimbursement limits and substantiation rules. Covered expenses included insurance premiums, doctor visits, and vision care. They set an annual cap of $15,000.

They established a reimbursement process using a spreadsheet and monthly tracking system. Receipts and explanations of benefits were stored securely. The business paid reimbursements from its corporate bank account. Everything was documented and separated from payroll.

Real Numbers: How the Savings Added Up

In the first year, the family incurred $12,500 in qualified medical expenses. This included premiums, out-of-pocket dental bills, and therapy sessions. Under the new plan, all expenses were reimbursed tax-free.

The C-corporation deducted the $12,500 as a business expense. This reduced the company’s taxable income for the year. At a 21% corporate tax rate, that’s a savings of $2,625 right there. But the benefits didn’t stop there.

Because reimbursements weren’t run through payroll, there were no FICA or Medicare taxes. This saved an additional $956 in employment taxes. On the personal side, the family didn’t pay income tax on the $12,500 received. At a 25% combined income tax rate, that’s another $3,125 saved.

In total, the tax savings exceeded $6,700. When combined with reduced out-of-pocket burden and payroll efficiency, the family realized over $10,000 in total value. These were real, tangible savings they could reinvest into their business.

Why This Strategy Works

This strategy works because C-corporation owners are treated as employees for tax purposes. That means they can receive tax-free benefits through a Section 105 plan. The corporation deducts the reimbursements as a business expense. The employee doesn’t include them in income.

This is different from sole proprietors or S-corp owners. Those owners cannot directly benefit from a Section 105 plan. Only C-corp owners have this advantage. That’s why this strategy is so powerful for one-person or family-owned C-corps.

The key is compliance. The plan must be documented in writing. Expenses must be properly substantiated. Reimbursements must be made from business funds. With those pieces in place, the benefits are clear and IRS-compliant.

Lessons Learned and Final Thoughts

The business owners were surprised at how simple the process was. Once set up, reimbursements became routine. They tracked receipts monthly and processed payments quarterly. It took less than an hour per month to manage.

The Section 105 plan also helped them better understand their healthcare spending. They became more strategic about budgeting for premiums and elective care. They also appreciated knowing their business could cover family health costs legally.

If you own a C-corporation and pay out-of-pocket for medical expenses, this strategy is worth exploring. A Section 105 plan may be the most overlooked tax benefit for small business owners. With minimal effort, you can turn healthcare costs into deductible business expenses.

Conclusion

This real-life example shows how powerful a Section 105 plan can be when used correctly. One small business saved over $10,000 in a single year by simply reimbursing medical costs through their C-corp. With proper documentation and compliance, any eligible business can do the same. For small business owners seeking savings and flexibility, a Section 105 plan may be the perfect fit.