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| Section 105 HRA
Solution to IRS Headliner 163 Limitations
for S Corporation Health Insurance Deductions
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Section
105 HRA and IRS Headliner 163
On May 15, 2006 the IRS issued IRS Headliner Volume
163 which changed the way one person S corporations
could take above-the-line tax deductions for their
health insurance.
 According
to IRS Headliner 163 the sole shareholder/employee
or owner of an S corporation can only take an
above-the-line tax deduction for health insurance
which is sponsored in the name of the S corporation.
Above-the-line simply means the deduction can
be taken off the top of gross income regardless
of whether the owner itemizes deductions.
The deduction for policies purchased
in the name of the sole shareholder/employee will
now be an itemized deduction subject to the 7.5%
Adjusted Gross Income limitation. This means only
insurance premiums in excess of 7.5% of AGI can
be deducted. Adjusted Gross Income is the income
left after all allowable deductions have been
taken. Example: The gross income after all deductions
are taken is $100,000, 7.5% of $100,000 is $7,500.
In this example only insurance premium in excess
of $7,500 can be deducted. So health insurance
deductions have been drastically limited if not
eliminated for one person S corporations. For
these individuals a $99 Section 105 HRA from Core
Documents could solve this problem.
Section
105 HRA Solution to the IRS Headliner 163 Problem
Core Documents has developed a solution for this
problem. The S corporation should establish or
sponsors a Section 105 Health Reimbursement Arrangement
or HRA plan document to reimburse individual health
insurance premium to the S corporation sole shareholder/
employee. This satisfies the IRS Headliner 163
requirement for a group plan. An added bonus of
the Section 105 HRA is the ability to also reimburse
out-of-pocket medical expenses tax-free.
Benefits
of Using Section 105 HRA for the IRS Headliner
163 Problem
There are numerous benefits to using a Section
105 HRA for the one person S corporation that
include:
- the ability to establish $10,000 to $20,000
or more per year in S corporation owner benefits
for insurance and medical expense reimbursement,
- 100% above-the-line income tax deduction without
the need to itemize,
- 100% deduction of the 15.3% self-employment
tax which is not available without a Section
105 HRA plan,
- 100% deduction of FUTA tax which is not available
without a Section 105 HRA plan,
- the ability to carryover unused funds in the
Section 105 HRA to the next Plan Year,
- the ability to accumulate tax-free healthcare
funds for retirement.
Deduct Health Insurance
the IRS Headliner 163 way or the Section 105 HRA
way:
The following example shows you the tax advantages
of a Section 105 HRA plan for one person S corporation
owners as opposed to the tax consequences available
under IRS Headliner 163:
| |
Group
Insurance |
Individual
Health |
Group
Section 105 HRA |
| Health Insurance Paid by |
Company |
Company |
Section 105 Plan |
| Deducted by Company as |
W-2 Income |
W-2 Income |
W-2 Income |
| W-2 Box 1 - Income |
yes |
yes |
yes |
| W-2 Box 3 or 5 for SS & Medicare |
yes |
yes |
no |
| Above-the-line tax deduction |
yes |
no |
yes |
| Itemized deduction necessary - subject to
7.5% AGI limitation |
no |
yes |
no |
| 100% self-employed health insurance deduction |
yes |
no |
yes |
| 15.3% self-employment tax due |
yes |
yes |
no |
| FUTA tax due |
yes |
yes |
no |
| ability to deduct out-of-pocket medical,
dental, vision w/o itemizing or 7.5% AGI limitation |
no |
no |
yes |
| Actual Tax Deductions allowed |
income tax only |
only $'s in excess of
7.5% AGI |
income tax + 15.3% self
employment & FUTA taxes (up to 50%) |
Copy
this table to your website and Core Documents
will sue for copyright infringement. |
$99 Section
105 HRA Plan Document Package Includes:
 Section
105 HRA Plan Document - Your Section
105 HRA Plan Document will custom prepared based
on information you provide in the application.
Your document comes in a one inch notebook. The
Plan Document should be accepted and signed by
an Owner or Officer of the Company and kept on
file for review by employees, accountants, IRS,
etc.
Section
105 HRA Summary Plan Description (SPD)
- Required for each employee. Explains the Section
105 Plan Purpose, Who is Eligible, How To Enroll,
etc. in easy to read language. Also includes all
information required by the Internal Revenue regarding
the Section 105 Plan Year Start and End Dates,
Agent for Legal Service, Fed. ID#, and information
regarding COBRA, FMLA, and required DOL information.
Section
105 Election and Claim Form -
Custom prepared for your Company it includes the
Section 105 Election Agreement and Claim Form
to submit bills for reimbursement by the Company.
Section
105 Administrative Handbook -
Includes sections on: Section 105 Administration,
Non-Discrimination Testing, and Reporting and
Disclosure information. You will be provided with
instructions regarding Section 105 Plan setup,
maintenance procedures, etc.
Resolution to Adopt
a Section 105 Plan- Includes minutes
of the meeting to adopt the Section 105 Plan as
an employee benefit.
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