Considering the steadily rising costs of healthcare, business owners are constantly searching for ways to help them offer affordable coverage for themselves and their employees. An effective but often misunderstood and overlooked option is the Healthcare Reimbursement Accounts (HRA). As part of our continued effort to educate our clients, we wanted to take a minute to address a few points related to these tax-friendly vehicles impact today’s small business owners.
HRAs are employer-funded, IRS-governed health benefit plans that reimburse employees for individual health insurance premiums and out-of-pocket medical expenses. This tax-advantaged plan is designed to assist both employers and employees in the management of growing healthcare costs.
There are ultimately several different rules governing participation and utilization of HRAs, depending on the type of organization:
· If you are an owner of a traditional C-Corporation, you can participate in and receive healthcare reimbursements completely tax free. This makes it an ideal option for tax-free business-owner health insurance premiums and medical expenses.
· If you are an employee in a C-Corporation, but also an owner or partner in a non-C-Corporation with more than 2% of the company’s shares, you can participate in and receive healthcare reimbursements, but not necessarily in the same tax free distribution as non-owners.
· If you are an owner or partner in an S-Corporation with more than 2% of the company’s shares, you can participate in and receive healthcare reimbursements, but they are subject to federal income tax withholding and must be reported on your W-2 and 1040 forms (however, similar to pass-through profits, they are exempt from Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes). Note that you can only take the 1040 self-employed health insurance premium tax deduction if your company pays for or reimburses you for premiums.
· If you are an owner in a Limited Liability Companies, you can participate in and receive healthcare reimbursements to a varying degree based on the way your company files taxes, but again, the reimbursements are subject to federal income tax withholding and must be reported on your W-2 and 1040 forms (though they are exempt from Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes).
· If you are an owner of a Sole Proprietorship (or otherwise self-employed), you can participate and use HRAs to track medical expenses, but only if your spouse is a W-2 employee, and you only receive above-the-line tax deductions (reimbursements are subject to federal income tax withholding) for personal health insurance premiums.
· If you a Director of a One-person Nonprofit or the Pastor of a Church, you may participate in an HRA and receive reimbursements for your entire family without any taxes or restrictions.
Obviously, there are additional fine points and considerations relating to each business entity structure, and a tax professional should be consulted, but this should at least provide some idea of how you as a small business owner can participate in these new Health Reimbursement Arrangements for tax advantaged healthcare cost management. We believe that all owners should enroll in this program, regardless of whether they are eligible to receive the full tax benefits or not, as any opportunity to limit tax liabilities is advantageous.
The ultimate benefit for the business that makes use of Health Reimbursement Arrangements is the reduction in taxable income as it relates to the business (and therefore relates to the taxable income of you as the owner of this flow-through tax entity).
It is recommended that companies and their owners employ an online HRA software platform to help them secure all potential income and payroll tax deductions for which they legally qualify. These platforms, which essentially simplify complex tax accounting regulations, are also helpful in the expense tracking required in the filing of state and federal income and payroll taxes (if interested, let us know and we’ll put you in touch with a reputable service provider)..
If you have questions about your eligibility, how to implement an HRA platform, or how to properly prepare and file the according taxes, contact Lescault and Walderman at 866-496-2042.