Show Title: Green Lights: The Physician's Tax Show

Episode Title: Section 105 MERP Hack: Turning Out-of-Pocket Family Healthcare into 100% Corporate Write-Offs

Presented by: Physician Tax Solutions

Overview

Building directly on Above-the-Line Healthcare Insurance (Episode 8) and Corporate Fringe Benefits via C-Corp Arbitrage (Episode 9), Episode 10 completes the healthcare tax trifecta: Section 105 Medical Expense Reimbursement Plans (MERPs).

Key Takeaways & Statutory Framework

• The Schedule A Trap: Personal itemized medical deductions require expenses to exceed 7.5% of AGI. For a physician earning $500,000, the floor is $37,500—wiping out write-offs for routine care.
• The Section 105(b) Advantage: Employer reimbursements for IRC § 213(d) qualified medical expenses (braces, implants, LASIK, copays, fertility, medical travel) are fully deductible to the business and 100% excluded from employee gross income, state income taxes, and FICA.
• Overcoming the S-Corp Barrier (IRC § 1372): S-Corp >2% shareholders are treated as partners and cannot participate directly. Strategists resolve this via:
  1. Sister C-Corp MSO: Clinical practice pays an arm's-length management fee to a sister C-Corp, which adopts the Section 105 MERP for administrative staff.
  2. Sole Proprietorship Spousal-Employee: Unincorporated consulting or active Schedule E entity employs the spouse, providing family-wide health coverage under § 105(b).

  By The Numbers: Schedule A Trap vs. Section 105 MERP

Evaluating a physician at a 37% marginal tax bracket with $500,000 AGI and $20,000 in annual family out-of-pocket dental, orthodontic, and medical costs:

1. Scenario A: Schedule A Trap (No Strategy)

AGI Threshold = $500,000 X 7.5% = $37,500

$20,000 expenses < $37,500 floor → Deduction} = $0

Gross pre-tax income needed to fund $20,000 post-tax:

Pre-Tax Income = $20,00/1 - 0.37= $31,746.03 →Tax Drag = $11,746.03

2. Scenario B: Section 105 MERP

• Entity tax deduction saves: $20,000 X37% = $7,400.00
• Tax-free reimbursement received: $20,000 (Personal tax = $0)
• Eliminates personal tax drag of $\$11,746.03$

Net Cash Preserved = $7,400.00 + $11,746.03 = $19,146.03 Kept in Your Bank

Audit-Proof Compliance Checklist

1. Formal Written Plan: Execute a written Section 105 document adopted by corporate resolution prior to paying reimbursements.
2. § 105(h) Non-Discrimination: Satisfy statutory eligibility and benefit coverage rules across non-owner employees.
3. Third-Party Substantiation: Require receipts, EOBs, and invoices proving qualified § 213(d) expenses.
4. Bona Fide Employment: If using the spousal-employee structure, maintain time logs and pay reasonable compensation for bona fide administrative services.

Links & Resources

• Schedule an Intro call
• Read the companion blog here