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HRA benefit boosts tax savings for business owners

While health insurance premiums and medical expenses are already income tax-deductible for a business owner, establishing a one-person HRA expands the deductibility. This article explains how the HRA benefit boosts tax savings for business owners.

 

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Can Business Owners Reimburse Themselves Tax-Free for Health Insurance?

by Jared Lewis, Demand Media –

Small business owners can benefit from existing tax laws and use a health reimbursement arrangement (HRA) plan to reimburse themselves, tax-free, for major medical expenses not covered by their health insurance. Under a Section 105 HRA Plan, employers can reimburse employees for these qualified medical expenses and avoid paying taxes on the payments. The catch for the small business owner who wants to reimburse himself is that he must be considered an employee of his own company.

Business Structure

Your ability as a business owner to reimburse yourself in a tax-free manner for your medical expenses depends on your business’ structure. If you operate a proprietorship, you generally cannot take advantage of a Section 105 HRA plan. You can, however, reimburse your spouse for related medical expenses if your spouse can be legally classified as an employee of your business. Business owners who are a part of a C corporation or an S corporation, however, can use the HRA plan to their advantage as long as they receive a regular salary from their business. In that kind of situation, the corporation is the employer and the business owner is legally considered to be a salaried employee.

Deduction vs. Reimbursement

Health insurance premiums and health-care expenses already are deductible to small business owners, without the use of the HRA. That factor raises the question of why a small business owner would want to bother with the HRA. In cases of health insurance premiums, the deduction taken on premiums paid is limited to income tax and cannot be applied to the self-employment tax. Health-care expenses are also deductible, but only to a point. The deduction is limited to up to 7.5 percent of the employer’s adjusted gross income (AGI) as of 2012. The HRA allows a business owner to deduct the entire expense.

Premiums

The use of an HRA plan allows employers to reimburse employees for both qualified medical expenses and the premiums paid by employees for their health insurance coverage. Some restrictions exist, however, and they limit an employer’s involvement in an employee’s selection of health-care coverage. Generally, an employer cannot be involved in the process nor can he pressure the employee to use HRA money for the purpose of paying premiums. An employer, however, cannot use the HRA tax savings to reimburse his own medical premiums.

Advantages

The primary advantages to the use of the HRA account is that it allows you to get back, in a tax-free manner, the money you pay in medical expenses. The overall result should be the reduction of your overall tax liability. The amount of savings varies based on the kind of plan you choose, your own expenses and applicable state laws that may limit your use of the HRA. The HRA’s primary advantage is that it allows you to reduce the potential impact of unforeseen medical expenses.

About the Author

Jared Lewis is a professor of history, philosophy and the humanities. He has taught various courses in these fields since 2001. A former licensed financial adviser, he now works as a writer and has published numerous articles on education and business. He holds a bachelor’s degree in history, a master’s degree in theology and has completed doctoral work in American history.

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Section 105 HRA plans are Medical Expense Reimbursement Plans that allow you to save substantial tax dollars on insurance premiums and out-of-pocket medical expenses not covered by insurance.

Section 105 HRA plans are designed specifically for small business owners that can legitimately hire their spouse, or C Corporation owner/employees, some S Corporation owners with caveats, LLCs, and more.  This type of plan is made possible by Section 105 of the Internal Revenue Code, Revenue Ruling 71-588 and IRS Letter Ruling 9409006.

Core Documents has been providing Section 105 HRA plans for small business owners since 1997. They would be happy to assist you in establishing your own small self-funded Section 105 Spouse HRA plan document and administrative kit for only $199. Call us today at 1-888-755-3373 and talk to a Plan Consultant about how we can assist you and reduce 2014 income tax liability.

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Additional articles on how the HRA benefit boosts tax savings:

Can Business Owners Reimburse Themselves Tax-Free for Health Insurance?

HRAs Are Still a Viable Tax Savings Device for Small Businesses

Section 105 Plans: How to Save Taxes if You Own a Microbusiness

A Section 105 Plan allows a qualified business owner to deduct 100% of…
…health insurance and dental insurance premiums for eligible employee(s) and family.
This also includes qualified long-term care insurance.
…uninsured (out-of-pocket) medical, dental, and vision care expenses for eligible employee(s) and family.
…life, disability income, contact lens, hearing aid, Medicare Part A, Medicare Supplemental, optical/vision,
and cancer insurance premiums for eligible employee(s).