Health Reimbursement Arrangements
HRAs, for short, are covered under Section 105 of the Internal Revenue Code. These employer-only paid plans are utilized for small businesses that want to ensure that any premiums or other medical costs not covered in some other fashion, will be reimbursed by the company.
To set one of these up, a summary plan description is done that qualifies who can be in the plan. Limitations are set up for employed years, months of service per year, hours of service per week and age. In addition, a maximum out of employer pocket per year is established, which aids the employer to know the most that he could stand to lose if everyone “maxed” out their expenses for the year.
These plans, if done by a sole proprietorship or sole member LLC, require the business owner to hire his/her spouse, pay her a reasonable salary, have documentation of the hours the spouse works and prepare all relevant payroll tax forms related to these wages.
These plans are unfunded, which means that no money is transferred anywhere in advance. The employee submits a monthly or yearly form that summarizes their out of pocket costs and the employer cuts a check and codes it to “HRA Expenses” on their books. Only the 2% or more shareholders/partners must have this designated on their W-2 and added to their federal and state wages only at year-end. A notation in Box 14 can allude to the amount of this addition.
Publication 15-B of the Internal Revenue Service discusses the advantages, however small, of running an HRA through an S corporation for the benefit of the 2% or more shareholders. These benefits from the employee’s wages are exempt from social security, Medicare, SUTA and FUTA taxes. No FICA benefit if already over the wage cap.
Health Savings Accounts
HSAs or medical IRAs, as they are referred to, are accounts set up for each employee to be used to pay medical expenses prior to meeting the deductible under the insurance policy. A high deductible insurance policy is utilized not to exceed $ 3K single and $ 5950 family coverage. There is an add-on of an additional thousand if the taxpayer is over 55 by year-end.
The deductible portion can be met in full or partially used, depending on the employer’s preference. Payment of both the deductible portion and the insurance premiums themselves can be paid completely by the employer, the employee, or something in between. Anything paid by the employee gets removed from the W-2 from all wage boxes, unless the employee is a 2% or more owner. In that example, treatment is similar to the HRA noted above with a special code used in Box 12.
The amount in the medical IRA gets utilized using a debit card presented to the doctor/pharmacist, along with the health insurance high-deductible insurance card. The money slowly gets whittled down as used and then the insurance plan goes into play once the deductible is met. There is no “use or lose” requirement. Anything not used is carried forward and is made available in years 2 and beyond.
By utilizing this type of plan, a company can better manage its health costs since the insurance premiums have been reduced due to the high deductible nature of the plan. They can also limit their costs in total, by having the employee pay a portion of these premiums/costs.