Section 105 Health Reimbursement Arrangements

Do you have unreimbursed medical expenses and Schedule C income?  If so, Section 105 of the Internal Revenue Code may be the key to keeping your health expenses in check as a small business.  A self- insured reimbursement plan once adopted by the employer or by you using your name if you have no separate entity, enables you to pay unreimbursed medical expenses and premiums out of your business directly and use these expenses to offset Schedule C income for your single member LLC or Sole Proprietorship. 

Normally to take a deduction for medical expenses, when you itemize these expenses must exceed 7.5% of your gross adjusted income.  However, with a section 105 health reimbursement plan, the reimbursement can start with the first dollar. Each and every, dollar spent on "qualifying  medical expense."

This begs the question, what is a qualifying medical expense?  These can be found in IRS Publication 502 and are pretty inclusive.  Regardless, if you have any sort of chronice illness, adopting a seciton 105 Health Reimbursement Plan that is self-funded (ie. paid out fo general assets of the business) can be extremely helpful!.  



The Quagmire of QDROs

QDRO is an acronym that seems to strike fear in the heart of many family law attorneys. Rather than dealing with QDROs themselves, many refer this work to QDRO experts. Regardless of whether or not you chose to undertake the drafting yourself, you should be aware of some of the issues surrounding QDROs and their drafting process.

I do not intend this blog post to be an all-encompassing review of all that is or is not required for a QDRO to be accepted by a Plan Administrator. For that information, I would refer you to the Department of Labor’s website, which has an excellent FAQ section: ( Instead, I would like to spend this post discussing issues I have seen in QDROs and giving some recommendations about what you need to know in order to draft a proper QDRO document. 

You may already understand a QDRO, or Qualified Domestic Relations Order, is a legal document, issued by a judge, used to divide qualified retirement accounts after a divorce is finalized. Specifically, it directs a Plan Administrator to divide the ex-spouses’ qualified retirement Plans as part of a divorce decree. These qualified plans can include pensions, Employee Stock Ownership Plans (ESOPs), profit sharing and 401(k) Plans, or other qualified retirement plans. If there is a valid QDRO, generally speaking the Plan Administrator will affect the agreed division of funds without taxes or penalties.

One of the biggest issues I find in the QDROs I see is a lack of detail. You can never be too specific, too exacting, or too detailed in your QDRO. One common problem is the failure to specify the percentage of the benefit that is to be paid to the receiving ex-spouse aka the “alternate payee.” Even if a percentage is specified, you need to understand what number that percentage will be based on. Where the division of money is involved, it never hurts to be too careful. In the event the QDRO becomes the subject of litigation, clarity of intent is crucial. Be creative, use examples to explain complicated processes, and be sure the document answers the questions most likely to be raised by a judge.

Another common issue with QDROs is that often drafters use template documents that do not contemplate the plan documents involved. A QDRO cannot ask the Plan Administrator to do something prohibited by the plan document. For example, if there are no in-kind distributions allowed, a QDRO cannot specify that one be made. In that respect knowing what is in the Plan you are dividing is crucial.

It is also worth noting that if the Administrator has a template document; it will likely favor their employee. It is a mistake to think that a QDRO is a neutral document, as it is drafted as part of a divorce—seldom a neutral process. Nonetheless, and with the exercise of due caution, a copy of the template from the Administrator can serve as a guide in your drafting, and the Administrator will likely expect—and appreciate—QDROs that look like their template. Regardless, you will want to have contact with the Administrator to understand the terms of the Plan.

So with that, what is it we want to see in a well-drafted QDRO? Ideally, a drafter will actually have the plan documents while drafting and use them to identify key issues necessary to preparing the document and ask questions in drafting like:

  • Is the retirement account holder fully vested?
  • Are there other things, such as COLAs that would affect the division of benefits?
  • If a percentage is specified, but a participant is not fully vested, a QDRO needs to specify what benefit amount the percentage is referencing and whether the amount that is to be divided includes only the vested portion or both the vested and non-vested portions.
  • If the participant had a loan out, should the loan amount be excluded from the amount divided?
  • Is there an agreed date for division? Absent a division date, market changes could significantly impact the parties’ interests.

Where these and other similar issues affect the intended division of funds, the QDRO needs to address them. If a QDRO is ambiguous, or if there are any voids, the Plan Administrator will not accept it.

Once you have a valid QDRO, do not delay in getting it to the Plan Administrator. Although there is no actual time requirement for filing a QDRO with the Administrator, if a participant were to take a loan or distribution in the interim, it could create problems recovering benefits for the ex-spouse. You do not want to be responsible for this outcome.

If you take anything away from reading this blog post, please let it be that you need to do adequate fact finding before proceeding with your draft:

  • Contact the Plan Administrator and obtain the plan documents;
  • Identify all pertinent questions flowing from the divorce decree to ensure that your QDRO answers them; and
  • If you are unsure, ask an expert. (Before long, you’ll be one too!)

To draft a QDRO without all the information needed will no doubt cause it to be rejected by the Plan Administrator, which will in the end send you back to square one.

The ideas set forth in this blog post are for informative purposes only and should not be regarded as personal legal advice. All situations are different and should be presented to a qualified legal professional.


Small Business Retirement Plan Options Every Attorney Should Know

I hear it so often, “My small business client wants to have a retirement plan. What’s the best option?” As with almost any question in law the answer depends on the client’s objectives.

Saving for retirement can be especially hard for small business owners. Making bills and the daily pressures of running a business can make saving a low priority. Even if a business is very profitable, traditional retirement plan options do not always allow the business owner to save in a way that might actually allow for a good amount of income replacement when they reach retirement age.

The most common retirement savings is done through traditional and Roth Individual Retirement Accounts or IRAs. The problem with IRAs is they offer extremely low contribution limits ($5,500 yearly limit, $6,500 if over age 50). These limits are far too low for a small business owner to save enough to have sufficient income replacement as they head into retirement. However, small business owners can offer and take advantage of retirement plans with significantly higher contribution limits and tax benefits.

This article is meant to be a brief synopsis of five specific types of retirement plans that provide greater opportunity for tax deferred savings to small business owners that hopefully will give them a leg up in their overall financial plan.


A Simplified Employee Pension Individual Retirement Arrangement (SEP IRA) allows a business owner to contribute a portion of the company profits pretax to each employee and to themselves. These contributions are based on a percentage of each employee’s earned income. The maximum contribution for 2013 is the lesser of $51,000 or 25% of an employee’s compensation or for a business owner 20% of their net earnings from self-employment. All contributions grow tax-deferred until they are withdrawn at retirement age. All plan contributions can be taken as a tax deduction to the business, thereby lowering taxable income. The SEP IRA does not allow for employee deferrals of any type and additionally you cannot borrow from a SEP.


A Savings Incentive Match Plan for Employees (SIMPLE) IRA gives each employee the option to make pre-tax deferral contributions from their salary into a retirement savings account. The limit for 2013 is $12,000. Participants over the age of 50 can contribute an additional $2,500 per year pre-tax. The employer is required to make a matching contribution of up to 3 percent of the employee’s compensation. As with an SEP IRA, the employer contribution is tax-deductible. While the contribution limits are not as high as the SEP, the SIMPLE IRA is a good solution for companies with employees that want to save a portion of their own income for retirement.

Individual or Solo 401(k)

The Individual 401(k) is designed to help sole proprietors (and their spouses) save more for retirement. Contributions are based on a percentage of income and in 2013, each participant can save up to $51,000 in the plan (those over the age of 50 can contribute an additional $5,500 in 2013). These contributions will not be taxed until they are distributed at retirement, and employer contributions subject to certain limitations can be used as a tax deduction for the business to offset taxes. The Individual 401(k) is appropriate for a sole proprietor with no plans to add additional employees. The biggest advantage of the Individual 401(k) over the SEP is that it allows the business owner to reach the maximum contribution level ($51,000) at a lower level of income.

Traditional 401(k)

The traditional 401(k) is designed to help employees save more for retirement. As of 2013 each participant can save up to $51,000 in the plan. The elective deferral limit for employees is $17,500 and those over the age of 50 can contribute an additional $5,500 in 2013. These contributions will not be taxed until they are distributed at retirement age, and employer matching and profit sharing contributions, subject to certain limitations, can be used as a tax deduction for the business to offset taxes. The 401(k) is appropriate for almost any business. The biggest advantage of the Individual 401(k) is that it allows employees to save for themselves and matching contributions can be optional.

Defined Benefit Plan

Defined Benefit (DB) plans offer business owners the opportunity to save many times what they would with other defined contribution options like 401(k)s SEPs and SIMPLEs. With a DB plan, the contributions are based on a projected retirement “benefit.” In other words, a business owner decides how much income they want at retirement (up to the 2013 benefit maximum of $205,000) and an actuary determines how much is needed to contribute to the plan each year. The DB plan is a great savings tool for a family business or a business with only a small number of “rank and file” employees. DB plans can be much more costly to implement and administer than other types of retirement plans and the plan sponsor needs to engage an actuarial firm to create the plan document and calculate the contribution amounts. It is also worth contacting an investment advisor to assist with the management of the portfolio.

Finding the right type of retirement plan to fit a client’s need is a critical piece of counseling small business owners. Company-sponsored retirement plans offer the benefits of tax-deferred growth, tax-deductible contributions and higher contribution limits than Individual Retirement Accounts. The decision about which plan to choose should be made within the context of a client’s overall goals and the size and profitability of a business.  Finally, do not be afraid to seek assistance if you feel you are out of your element in counseling an employer about retirement plan options!


The Prudent Man Standard

If you are a fiduciary, you are expected to act like a "prudent man.“    This means fiduciaries are , “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims” (ERISA § 404(a)(1)(B), 29 USC § 1104(a)(1)(B)).

I was curious as to where the term prudent man originated.  It can be found in an 1830 Massachusetts court decision Havard v. Amory where the court encourages the trustee "to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested."

If only all plan fiduciaries would discharge their duties with this kind of diligence!   




409A Nonqualified Deferred Compensation Plans

I spent an hour listening to a discussion of section 409A Nonqualified Deferred Compensation Plans.  The regulations relating to section 409A plans were purportedly from the wake of Enron, where I am told Enron's executives deferred compensation plans were sped up to get them paid prior to the bankruptcy.  The IRS understandably doesn't want people being able to mess around with this.  However, the 409A rules seem really complex and the penalties for running afoul of the requirements are draconian.  Noncompliance means that all amounts payable for the duration of the agreement become taxable immediately and subject to a 20% excise tax plus a premium interest tax that I am told is hard to calculate.  It appears to be the sort of thing that an Employer could inadvertantly fall into with terrible consequences. 

Here are the regs, very interesting read.