Let Your Business Pay Your Insurance and Medical Expenses Using a Section 105 HRA
March 7, 2007
Vol. 3, Issue
If you are self-employed, your income is subject to a 15.3% self-employment FICA tax. Added to a 28% Federal income tax and a 5% state income tax, this could leave you paying nearly 50% of your income to the government. Fortunately, most self-employed people qualify to set up an HRA or Health Reimbursement Arrangement. An HRA can enable your business to reimburse you for health insurance and out-of-pocket medical expenses, and will save you an extra $3,000 or more in addition to the savings your HSA provides.
HRAs for the Self-Employed
An HRA is simply an agreement which enables your business to cover employee's medical expenses, including individual health insurance premiums, as a tax-free fringe benefit. This tax benefit was established in Section 105 of the IRS tax code in 1955, when General Electric lobbied for a business reimbursement rule to give it more flexibility in creating employee benefits.
Anyone set up as an S-corp or C-corp qualifies to set up an HRA. If you are a Schedule C or Schedule F sole proprietor, an HRA is allowed if your spouse can work at least part time in the business. You will be setting up an employee benefits package that covers health insurance premiums, disability insurance premiums, long-term care premiums, and even out-of-pocket medical expenses such as dental coverage.
So Simple, a 4 Year-Old Can Understand Them
"Do you want to spend more money, or less money?"
A couple weeks ago I took my family to Mexico for the week. Late one afternoon I was sitting on the porch of our condo, sipping on a Herradura Reposado, and sneaking in a little vacation work on my laptop. Wiley IV asked what I was doing, and I told him I was writing a report about HRAs.
I told him an HRA makes your taxes go down. That is because when you get to write off medical expenses on your Schedule C, you avoid paying Federal income taxes, state income taxes, and the 15.3% FICA self-employment tax. Not only can the business reimburse you for the cost of health insurance premiums, but you can also set up the HRA to reimburse for dental coverage, preventive care, disability insurance, long-term care insurance, and other out-of-pocket medical expenses.
If you are self-employed but do not have an HRA, you can write off your health insurance premiums on your 1040, saving you Federal income taxes, but you are still subject to FICA and state income taxes for these expenses. You are not able to write off any of the other expenses listed above.
Using an HRA with an HSA
Some financial advisors do not realize that you can have an HRA along with an HSA. You can of course, the only caveat being that the HRA cannot reimburse for expenses that could apply toward the deductible of the HSA, such as doctor visits or prescription drugs. But, it can cover any insurance premiums and preventive care.
The potential savings are substantial. Let's assume Business Owner Bob is in a 28% tax bracket, has an HSA plan, and is incurring the following expenses.
Health insurance premiums - $7,000
Preventive expenses - $1,000
Other insurance - $2,000
Since he is self-employed, he can write off the $7,000 premium on his Federal income taxes, saving 28% of that or $1,960. If he fully funds his HSA, he will save an additional $1,582 off his Federal income taxes and $282.50 from his state income taxes. So, in total, his taxes will go down by $3,824.50.
Once Bob sets up an HRA, the entire $10,000 in expenses listed above can be reimbursed by the business. So he will be saving $2800 from his Federal income taxes, $500 from his state income taxes, and $1,530 in self-employment taxes. He'll also get to take advantage of the same $1,960 in HSA tax savings, for a total tax reduction of $6,790.
Quit Overpaying Your Taxes
Smart business people take advantage of all the tax deductions for which they qualify. Because an HRA is so easy to set up and takes almost no administration, many HSA for America members have already signed up for one. You can reimburse health insurance expenses from the beginning of the year, but out-of-pocket expenses only from the date your HRA begins, so you should get this set up now.
HSA for America has made it easy and inexpensive for our members to take advantage of this tax benefit. For only $297, we will set up all legal plan documents, and even have all your reimbursements reviewed at the end of each year to ensure tax compliance. To sign up, simply go to http://www.HSAforAmerica.com/HRA.htm. For a more detailed description of HRAs, order our special report, Section 105 HRA Plans For The Self-Employed.
We are all about saving you money and helping you manage your healthcare expenses in a more intelligent way, and we strive to make it easy. If you have any questions about this, let me know.
P.S. - Since next month the tax man cometh, in his honor I'll be discussing smart record-keeping strategies for those of us with an HSA.