HRA Resources Blog

 
 
18.11.2017
George Kelly, EA
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Wrong Question... Yes, you can have an HSA and a QSEHRA at the same time but, what you really want to know is if you can make tax free contributions to a Health Savings Account (HSA) in the same tax year you were provided a QSEHRA. That is a bit more complicated, let's jump into it.  This article was prompted by IRS Notice 2017-67 which provided administrative and procedural guidance on the QSEHRA. The notice indicated a departure from the HRA compatibility requirements which call for a deductible on the HRA equal to the qualifying high deductible health plan (HDHP) deductible. According to the guidance, the QSEHRA is not permitted to impose a deductible therefore, may be disqualifying coverage for those provided the benefit by their employer. The determination comes down to what and whom is covered by the QSEHRA. Background Under section 223, individuals who have high deductible health plan (HDHP) coverage and no other disqualifying health coverage may contribute to an  HSA. Individuals who are covered by permitted insurance (defined under section 223(c)(3)) or certain disregarded coverage (defined under section 223(c) (1)(B)), in addition to HDHP coverage, remain eligible to contribute to an HSA. When we are talking about reimbursement plans, disqualifying coverage would be any plan which provides reimbursement for any benefit which is covered under the high deductible health plan except coverage for accidents, disability, dental care, vision care, or long-term care, and insurance premiums. QSEHRA Interaction First, let's establish that the QSEHRA is not elected coverage. Section 9831(d)(2)(A)(ii) requires that the eligible employer provide, rather than offer, a QSEHRA on the same terms to all eligible employees. This means that if the benefit is provided by your employer and you are eligible you may not waive eligibility to circumvent the disqualifying coverage rules. QSEHRA (non-premium only plan) Here we are talking about the full QSEHRA, which provides for the reimbursement of all qualified medical expenses including health related insurance premiums. If your employer provides the QSEHRA participants may not make tax free contributions to an HSA when they are covered by the QSEHRA. The full QSEHRA is considered disqualifying coverage under section 223. Covered Persons The extent of who is disqualified depends on the QSEHRA's coverage. Schedule A of your Summary Plan Description defines coverage, if eligible expenses does not include amounts paid for dependents expenses then the plan does not disqualify them from making tax free contributions to an HSA. Moreover, the HSA Special Contribution Rule for married spouses says if a spouse has non-HDHP coverage (such as a QSEHRA) that does not cover the other spouse, the uncovered spouse is HSA-eligible. The contribution limit is determined based on the HSA-eligible spouse’s coverage, without applying the special contribution rule. This means that the HSA-eligible spouse may contribute the full amount based on his or her HDHP coverage and no allocation is made to the ineligible spouse. QSEHRA POP (Premium Only Plan) Here we are talking about the QSEHRA POP, which limits the reimbursement  to expenses for health related insurance premiums. If your employer provides the QSEHRA-POP participants may make tax free contributions to an HSA when they are covered by the QSEHRA-POP. The QSEHRA-POP is considered disregarded coverage under section 223. Hopefully this is a helpful primer on the compatibility between HSA contribution and QSEHRA participation. If you have a question, feel free to leave it in the comments and we will respond as quickly as we can. NOTE: HSA compatibility with the single participant HRA is different than the QSEHRA. Click here to answer the question, Can I have an HSA and HRA at the same time?
15.11.2017
George Kelly, EA
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Keeping up with legislation has been difficult on churches. Over the past two years I have had dozens and dozens of difficult conversations with clergy from small, local Churches who have been tearfully concerned about their health insurance. Most have faced a series of events that has pushed their ability to maintain adequate health coverage into a death spiral. Notices of a large premium increases, that they can not afford, combined with conflicting information regarding the ability of  Churches to contribute to clergy's health insurance premiums has created a crisis. In 2016, fewer than half of the solo pastors in the U.S. received any health insurance benefits. Many small businesses and practitioners I work with had not heard of an HRA prior to the 2013 IRS guidance that attempted to prohibit them. But small Churches with solo pastors, they have been using defined contribution plans or some form of "employer payment plan" since before Revenue Ruling 61-146 was issued, January 01, 1961, which essentially created tax-free health insurance reimbursement plans. In 2013, IRS Notice 2013-54, a poorly crafted, overreaching piece of subregulatory guidance, effectively shut down these reimbursement arrangements that were widely used by small religious organizations. Governing associations, religious orders and the informal network of advisers to these small nonprofits broadcast the warning, Churches may not pay or contribute to clergy's health insurance. If something has to be done, they said, increase pay for your clergy. The confusion touched off by this guidance has lingered. I still speak with Church boards today that do not have a clear understanding of their options. In fact, many of them have an inaccurate belief that they cannot legally help their clergy with a health benefit other than group health insurance, and that is generally out of reach. They believe they are fettered to increasing pay to help pastor's with health coverage.  The clergy are subject to a different set of rules, when it comes to taxation. They are generally paid as W-2 employees however, the employing nonprofit does not pay traditional payroll taxes, the clergy pays them, for both parties. For the purposes of payroll taxes, pastors are self-employed and must pay 15.3% of their earnings to payroll taxes. So, increasing pay is not a coveted plan.   These small organizations do not have the capital to spring for group health insurance. They were not high on the list of prospective clients for insurance brokers, a typical source for regulatory guidance to small organizations. So, many of them do not understand the law. They don't know about the single participant exclusion from the IRS's heavy handed guidance. And they haven't heard about the new qualified small employer HRA. There absolutely are viable, affordable options for small, nonprofit religious organizations to provide tax-free dollars to clergy for health insurance premiums and qualified medical expenses. Whether it is a solo pastor or full-time pastors, worship/music leaders and staff, there are options.  Over the last two years, many of those difficult conversations I have had ended in tears. Thankfully, they were tears of joy because we were able to help get health benefit plans in place. Over the past two years we have had the privilege of helping these blessed organizations provide health benefits through an HRA or QSEHRA: Upper Deer Creek Church Camp Fairwood Word of Life Community Living Faith Missionary Church Parkview Church Atwater Community Church of the Nazarene Phantom Ranch Bible Camp Shoreline Community Church The Seed Church Calvary Baptist Church Garner United Methodist Church Kirtland Christian Fellowship Novation Church Syracuse Church of Christ Vertical Church Tuscon Church of Christ Forest Ridge Community Church National Farm Worker Ministry First Baptist Church First Baptist Church of South Haven Church in the Wildwood (Christian) Inc. ASAP Ministries Calvary Grace Assembly of God Liberty Community Church The Falls Lititz Moravian Congregation Christ the King Lutheran Church Chaparral Baptist Assembly, Inc Trinity Forum Academy Eudora Baptist Church CityLight Church Baptist International Evangelistic Ministries Grace Baptist Church Metro Detroit Christian Church Cross Church Grace Baptist Church (Stuart, VA) Marlowe Assembly of God Caesar Ministries Farragut Christian Church Mamre Baptist Church (Kitts Hill OH)
01.11.2017
George Kelly, EA
No comments
Three weeks ago, we told you about the executive order the President signed (in our blog post Executive Order Seeks to Expand Use of HRAs). The order asked the Departments of Treasury, HHS and Labor to explore how they could allow more businesses to use Health Reimbursement Arrangements (HRAs). Today, the Internal Revenue Service (IRS) issued Notice 2017-67.  This notice provides long awaited guidance on the qualified small employer health reimbursement arrangement (QSEHRA). The QSEHRA plan is a great small business alternative group coverage. The plan was welcomed when it was signed into law in 2017 and, it overturned guidance previously issued by the Internal Revenue Service and the Department of Labor that stated that HRAs violated the ACA’s market reforms, subjecting small employers to a penalty for providing such arrangements. In this post, we will cover the notice in detail. What it means moving forward and its impact on existing plans. The Notice Today’s 59-page notice uses the language that Treasury and IRS intend to incorporate into proposed regulations. This means there will be an open public process period for comments and, soon thereafter, publication of the proposed and final rules in the Federal register. It is likely most of the guidance in the notice will eventually be codified however, there are one or two guidelines that may not make it all the way to the code. Anyone interested, (individuals and groups), may respond with comments aimed at developing and improving the guidance or by recommending against issuing a rule by writing and including a reference to Notice 2017-67 to: CC:PA: LPD:PR (Notice 2017-67) Room 5203 Internal Revenue Service P.O. Box 7604 Ben Franklin Station, 54 Washington, DC 20044 The guidance in Notice 2017-67 has established administrative procedures that will be required of all plans established on or after October 31, 2017. All employers that established QSEHRA plans prior to this date may continue to operate the QSEHRA according to its terms until the last day of the plan year that began in 2017 so long as the employer established and operated the plan in accordance with a reasonable good faith interpretation of the applicable statutory provisions. Because of the language in IRS 2017-20 which provided transitional relief from the required employee notice provision, 2018 initial written plan notices to eligible employees must be provided by the later of (a) February 19, 2018, or (b) 90 days before the first day of the plan year of the QSEHRA. Eligible Employers To “qualify” to offer a QSEHRA an employer cannot offer a group health plan. The departments clarified that an employer will not qualify to offer a QSEHRA if it offers any group health plan benefits, including group vision, dental or flexible spending account (FSA) plans. Employers may offer HSA contributions, HSA elective deferrals and retirement HRAs without jeopardizing their qualified small employer status. And finally, the notice clarified that control groups may not be treated as separate entities for purposes of qualifying as a small employer.  Eligible Employees The guidance adopts IRC § 1.105-11(c)(2)(iii)(C) for purposes of determining whether an employee may be excluded from eligibility based on part time employment. It also clarifies, the plan is for the benefit of employees only and employees may not “waive participation” in the plan. The QSEHRA is provided rather that offered to eligible employees. The departments illustrate that a married couple working for an employer that provides a QSEHRA are entitled to separate permitted benefits however, the plan may not provide duplicate reimbursements of a single expense.  The plan may not offer a choice between two benefit options, e.g. all medical expenses verses premium only plans however, employers are permitted to uniformly exclude specific expenses from eligibility. Plans may reimburse Medicare and Medicare Supplement plans but may not limit reimbursement to only Medicare expenses. The notice provides that carryover of unused funds is allowed however, the sum of the carryover and the permitted benefit may not exceed the annual statutory limit. Where this could come in handy is in reporting the QSEHRA allowances. Premium tax credits are essentially reduced by the permitted benefit which is reported on the employees W-2. The notice allows carryover of unused funds and requires an adjustment to the permitted benefit when the sum of the two would exceed the annual limit. In cases where the permitted benefit has been reduced to make room for carryover funds, the reported allowance amount is also decreased. The notice clarifies that the same terms requirement applies to excludable employees. Although not required, if the QSEHRA is provided to employees in an excludable class, they must be provided the permitted benefit on the same terms as non-excludable employees. MEC Requirement The notice reiterates that before a QSEHRA can reimburse an expense for any plan year, the eligible employee must first provide proof that the eligible employee and (if different) the individual whose expense will be reimbursed has MEC for the month during which the expense was incurred. Moreover, the guidance requires employers to obtain a statement from the employee with each reimbursement claim attesting that MEC is in place on the individual whose expense is being reimbursed, this in addition to the annual, initial proof of MEC. Additionally, the guidance prohibits post-tax reimbursements of expenses incurred by participants failing to provide proof of MEC.   Substantiation requirement One of the expected requirements imposed by the guidance is the adoption of substantiation requirements under Proposed Treasury Regulation Section §1.125-6, which provides rules for substantiation of expenses that must be satisfied before paying or reimbursing any expense for a qualified benefit (outlined in IRB 2007-39). This regulation also defines how claims are to be substantiated and provides a framework of eligibility determination.  If an eligible employer pays an issuer directly for an employee’s premium payment or uses the methods for payment of premiums described in Rev. Rul. 61-146, 1961-2 C. For other expenses not directly paid for by the employer, §1.125-6 must be followed. Self-substantiation by an employee does not satisfy the substantiation requirements. In other words, a participant cannot attach a note to their claim form that basically attests to the fact that they incurred an eligible expense during their period of coverage. The substantiation must be verified by s third party such as a designated plan administrator or claims administrator. An explanation of benefits (EOB) provided by an insurance company would qualify as third-party substantiation for this rule. Failure to properly substantiate claims for reimbursement would cause the QSEHRA to fail to satisfy the requirements for the payments to be excluded from the employee’s income, and all payments to all employees under the arrangement, substantiated and unsubstantiated, on or after the date the failure occurred, become taxable. Reimbursement of medical expenses IRS Notice 2017-67 prohibits employers from cashing out unused funds at the conclusion of the plan year. Also, the guidance prohibits the plan from imposing deductibles or cost sharing requirements on participants.  Employers providing a QSEHRA are not required to file IRS Informational return 1094-B however, they are required to file IRS Form 720 and pay the annual Patient Centered Outcomes Research Institute (PCORI) tax each year. Interaction with HSA requirements The notice provides straightforward guidance on how the QSEHRA impacts HSA contribution eligibility. If the QSEHRA is structured to reimburse all medical expenses, it disqualifies the participants from making tax advantaged contributions to an HSA in the same year. If the QSEHRA is structured to reimburse health insurance premiums only (QSEHRA-POP), it does not disqualify participants from making tax-advantaged contributions to an HSA in the same year. Failure to satisfy the requirements to be a QSEHRA The QSEHRA is structured under "exceptions" to group health plan law (26 U.S. Code § 9831). The consequence of noncompliance, such as  providing a QSEHRA when you're not an eligible employer, not providing the benefit on the same terms to all eligible employees, reimbursing medical expenses without first requiring proof of MEC, or providing a permitted benefit in excess of the statutory dollar limits, will not only cause the plan to lose tax favored status but may also subject a non compliant employer to penalties under 26 U.S. Code § 4980D ($100 per day per employee).
27.10.2017
George Kelly, EA
No comments
Our software does the initial notice for you. Employers offering a QSEHRA are required to provide all eligible employees with a notice that includes the following: The employee’s permitted amount for the year; An instruction to provide that information in any application for an Affordable Care Act (ACA) exchange premium subsidy; and A warning that the employee may be taxed under the ACA’s individual mandate, and owe income tax on QSEHRA reimbursements, unless he or she obtains “minimum essential coverage.” The IRS waived the notice requirement for 2017. For 2018, the notice requirement in in place. Our clients are pleased to know HRA Plan Docs creates the notice and delivers it with your plan documents, ready to distribute. We also provide clients with a "fillable" employee notice for new hires. The employee’s permitted amount for the year. The initial notice is distributable to all employees that will be eligible on the first day of the plan. For new hires, clients will have to use the fillable template. Because the law requires the notice provide the employee’s permitted amount for the year, employees that are not eligible for the entire year will have a prorated benefit.  Our fillable template has six fillable fields, here is how to complete them: Sponsoring employer's legal business name (as it appears on the plan document); The plan's effective date; Full Time or Part Time (who is the notice for); Maximum annual contribution, employees without dependents: monthly allowance times the number of eligible months. (remember, the QSEHRA is a calendar year plan); Maximum annual contribution, employees with dependents: monthly allowance times the number of eligible months. (remember, the QSEHRA is a calendar year plan); Plan administrators name and address (business address is acceptable). The law  requires an eligible employer to furnish a written notice to its eligible employees at least 90 days before the beginning of a year for which the QSEHRA is provided (or, in the case of an initial plan year or an employee who is not eligible to participate in the arrangement as of the beginning of such year, the date on which such employee(s) is/are first so eligible). The penalty for failing to provide timely notices is imposed as a tax of $50 per employee per incident of failure to provide such notice with an annual maximum of $2,500, unless it is shown that such failure is due to reasonable cause and not willful neglect. 
19.10.2017
George Kelly, EA
No comments
QSEHRA contribution limits for 2018 It is always amusing when the Service has a statutory deadline, like the October 1 deadline to provide QSEHRA participants written notice of their benefit, and releases helpful information weeks after said deadline. The IRS released the 2018 QSEHRA guidelines through Revenue Procedure 2017-58 on October 19, 2017. Luckily, HRA Plan Docs computed the increase from CPI in August so our clients were able to provide accurate employee notices. The 2018, QSEHRA contribution limits increased $200 annually for self-only employees and  $250 annually for employees with a family. An increase of roughly $16.66 per month for self-only employees and $20.83 for employees with a family. See the chart below for details: The maximum monthly allowance for 2017 Plans Employee Only$412.50 Employee w/ Dependent(s)$833.33 The maximum monthly allowance for 2018 Plans Employee Only$420.83 Employee w/ Dependent(s)$854.17
13.10.2017
George Kelly, EA
No comments
The New HRA for Qualified Small Employers The passage of the 21st Century Cures Act in December of 2016 minted a new HRA benefit, the Qualified Small Employer HRA. The law was essentially a compromise between lawmakers, who understood that small businesses that did not offer traditional group health benefits wanted to provide a non-traditional health benefit, and the Departments of Labor and Treasury, which had issued coordinated guidance in 2013 effectively barring small businesses from using existing tax law under 26 CFR 1.105-11 for tax free reimbursement of medical expenses if the plan had two or more eligible participants. The Departments contended that “old” Section 105 plans were “group health plans” and therefore subject to the ACA’s “market reforms” which apply to all group health plans. To bypass the ACA, congress wrote the “new” law, forming the QSEHRA, under 26 U.S. Code §9831, exceptions to group health plans. The Same but, Different The reimbursement plans constructed under these two code sections are very similar, in some respects. Both allow for the tax free reimbursement of qualified medical expenses. Both are 100% employer funded with no salary reduction contributions however, the QSEHRA does have some advantages regarding administration. The entirety of the QSEHRA is found in Public Law 114-255, Section 18001. Benefits of the QSEHRA Under the current law, there are no statutory substantiation requirements for employers. The law gives Treasury the ability to issue substantiation rules but does not require them. The law specifically exempts QSEHRAs from compliance with 29 U.S. Code Part 7 including the “market reforms,” HIPAA, COBRA, Portability, Access, Renewability and other requirements. The exemption from these provisions means the QSEHRA is easier to administer for small businesses. The law has very few employer requirements: Offer the benefit on an equal basis to all full time employees Provide a prescribed notice Verify Minimum Essential Coverage to determine eligibility Adhere to an annual benefit limit W-2 Reporting The employee is tasked with determining the tax treatment of any reimbursements through the required notice. Benefits and Additional Requirements of Section 105 Section 105 plans or, Self Insured Medical Reimbursement Plans, as they are called in the law, have several appealing advantages. For one, there is no statutory benefit limit, making it a more realistic plan in terms of modern medical expenses. Without the annual limit, employers can allow unused balances to roll over and accumulate (although federal law restricts the accumulated balance to four times the annual benefit). Second, there is no requirement to carry minimum essential coverage. And finally, employers can group employees into job-criteria based eligibility classes and each class is essentially treated as a separate plan with different allowance amounts. This gives employers almost unlimited flexibility in terms of plan design. Those benefits are somewhat counterbalanced by additional administrative burdens. § 1.105-11 Self-insured medical reimbursement plan is a group health plan subject to all of the provisions set forth in 29 U.S. Code Part 7. This simply means there are more rules to follow, substantiation requirements, HIPAA and COBRA requirements. These rules can be fairly easy to comply with for smaller employer but, the more participants in the plan, the more complex the administration. The Future of Health Expense Reimbursement We are anticipating a roll-back of the guidance provided under IRS Notice 2013-54 and Technical Release 2013-03, which subjected Section 105, Self Insured Medical Reimbursement Plans, commonly referred to as HRAs, to the “market reforms” of the ACA. The recent Executive Order on Health care instructs the Departments of Treasury, HHS and Labor to explore how they can allow more businesses to use Health Reimbursement Arrangements (HRAs). What does a rollback of the guidance mean for the QSEHRA? We do not anticipate a repeal of IRC 9831(d). I believe the QSEHRA is here to stay. Eventually, small businesses will have the option of choosing the type of HRA they want, a simple, self-administered QSEHRA or, a more flexible but slightly more complex Section 105 HRA.
12.10.2017
George Kelly, EA
No comments
Executive Order Signing On October 12, 2017, the President signed an executive order asking the Departments of Treasury, HHS and Labor to explore how they can allow more businesses to use Health Reimbursement Arrangements (HRAs). How does this affect the QSE-HRA and how should you plan for your small business? Until guidance is issued from the departments, there is no impact on Qualified Small Employer HRAs. Current regulatory requirements have not been changed by the executive order. We at Plan Docs anticipate a roll-back of the guidance provided under IRS Notice 2013-54 and Technical Release 2013-03, which subjected Section 105, Self Insured Medical Reimbursement Plans, commonly referred to as HRAs, to the “market reforms” of the ACA. Should this guidance be repealed, HRA Plan Docs is prepared to immediately offer Section 105 plans for small businesses. Moreover, we will provide existing clients the option of transitioning from the QSE-HRA to a Section 105 plan at no charge.
My employees are on their spouse's work insurance. A common speed bump for employers considering a reimbursement plan is understanding how employees that have medical insurance coverage through a spouse's employer will benefit. This is called employer-sponsored coverage. The most common example: employees having coverage through a spouse. There are two "types" of major medical insurance: Individual: meaning it is purchased by a person, an individual, as opposed to an organization. Individual coverage can cover an entire family. "Individual" refers to the purchaser. Individual insurance follows the individual, it is not tied to employment. Group: meaning it is purchased by an organization and offered to employees of the organization. Group coverage follows the organization, when one leaves the organization the coverage does not follow. All group coverage is sponsored by an "employer" or organization. Most employers offering group coverage also provide a mechanism for employees to contribute their share of the premium, if any, through a pre-tax payroll deduction. Why is that important? Under the current law, everyone is supposed to carry minimum essential coverage. Everyone is supposed to have insurance. So, if you are offering a reimbursement benefit it is a safe bet that just about everyone is paying for insurance. Even those employees that are on their spouse's plan. In most cases there is a pre-tax deduction coming out of every paycheck that pays for their coverage. Options When you are completing the plan design form you will choose whether or not your plan will allow for the reimbursement of employer sponsored premiums: Allow reimbursement of Employer Sponsored Premiums? Generally spousal coverage. (Premiums paid to employer sponsored coverage ARE/ARE NOT eligible for reimbursement with an Acknowledgement of tax responsibility.) * ARE ARE NOT  When allowed, employees may seek a reimbursement for the amount being deducted from their spouse's paycheck to pay for their insurance. All they have to do is: Submit a copy of their insurance card; Submit a copy of the spouse's pay stub showing the deduction Submit a recurring claim form, so they don't have to submit stubs every pay day; Submit a signed acknowledgement of tax responsibility. Acknowledgement of Tax.... Remember how employers offering group coverage also provide a mechanism for employees to contribute their share of the premium through a pre-tax payroll deduction. Yes, so, the IRS is not going to allow them to receive a tax-free reimbursement for an expense that was paid for with a pre-tax deduction. The "acknowledgement" is the employer's way of informing employees that they are responsible for accurately reporting reimbursements that are ineligible for tax-favored treatment. No double-dipping.  Reporting the reimbursements is actually very simple. The employee adds up all the reimbursements they received for payroll contributions to their spouse's group insurance and reports the total on line 21 of their 1040, "other income." What if we do not allow employer sponsored premium reimbursement? The question is, why wouldn't you? But, if you did not allow it, employees could still use the allowance for eligible out-of-pocket expenses, presuming you did not opt for the POP plan, and as long as they are not contributing to an HSA.  For answers about having an HSA and an HRA at the same time see this post.
05.04.2017
George Kelly, EA
No comments
Confused About S-Corp Reimbursement Arrangements? Everybody seems to be confused about S-Corp shareholder participation in medical reimbursement plans. There is also confusion about S-Corp shareholders deducting health insurance costs and the steps that need to be taken to allow the deduction. This post is for S-Corp shareholders, why you absolutely want to participate in your business’s reimbursement plan and how to achieve the same tax advantage as your employees. Health reimbursement arrangements are all actually a version of a Self Insured Medical Reimbursement Plan, codified in 26 CFR 1.105-11. The different acronyms associated with the plans, HRA, HRP, MRP, MERP, HIRP, et al, are not exactly legal terms, even though you will find them in Treasury guidance, these are acronyms coined by administrators, brokers, insurance carriers and even the government to distinguish them from one another. They can have different plan structures and eligible expense exclusions depending on how they are offered, as an integrated plan or a stand alone plan, which have different regulatory requirements. In all structures, and acronyms, IRC Section 106 allows the value of the self-insured medical reimbursement plan to be tax-free to employees, unless you are an owner employee. The IRS has specific rules related to the inclusion of fringe benefits as income for Sole proprietors, partnerships and S-Corp shareholders. IRS Notice 2008-1 does a fair job of outlining these special rules. In February of 2015 the IRS released IRS Notice 2015-17 which contained guidance on the application of Code 4980D (the tax applied to non-compliant plans) to health reimbursement arrangements. It also provided some clear guidance on S-Corp shareholder participation. Here is what the notice said:  The Treasury Department and the IRS are also considering whether additional guidance is needed on the federal tax treatment of 2-percent shareholder-employee healthcare arrangements. However, unless and until additional guidance provides otherwise, taxpayers may continue to rely on Notice 2008-1 with regard to the tax treatment of arrangements described therein for all federal income and employment tax purposes. As of this writing the IRS has not released any guidance or proposed regulations and taxpayers may continue to rely on the guidance provided in Notice 2008-1. Perhaps this is where the confusion takes root. Notice 2008-1 states that: Accident and health insurance premiums paid or furnished by an S corporation on behalf of its 2-percent shareholders in consideration for services rendered are treated for income tax purposes like partnership guaranteed payments under § 707(c) of the Code. Rev. Rul. 91-26, 1991-1 C.B. 184. An S corporation is entitled to deduct the cost of such employee fringe benefits under § 162(a) if the requirements of that section are satisfied (taking into account the rules of § 263).  The underlined text, indicating that the S-Corp is to take the deduction, is likely to be confusing. In 2008, when the guidance was published, this deduction was typically taken on the Schedule SE (Form 1040), beginning in tax year 2011, this deduction was no longer allowed on Schedule SE, you now had take it on Form 1040, line 29. Therefore, a shareholder owning more than 2 percent of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2 who is paying for medical, dental or long-term care insurance can take a deduction on line 29 of their 1040, a frontpage, non-itemized deduction, as long as the insurance plan has been established under your business. Notice 2008-1: A 2-percent shareholder-employee in an S corporation, who otherwise meets the requirements of section 162(l), is eligible for the deduction under section 162(l) if the plan providing medical care coverage for the 2-percent shareholder-employee is established by the S corporation. Rev. Rul. 91-26, 1991-1 C.B. 184. In most cases where this is a question the S-Corp does not provide group health insurance, the shareholder has an individual health insurance policy in the shareholder’s name. In that case, if the policy is in the shareholder’s name and they pay the premiums themselves, the S corporation must reimburse the shareholder and report the premium amounts on Form W-2 as wages to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under the business and the shareholder cannot take the line 29, self-employed health insurance deduction. IRS Tax Tip 2012-51 does a good job of explaining this. S-Corp shareholder treatment in a self insured medical reimbursement plan When an employee shareholder participates in a self insured medical reimbursement plan, specifically one designed to comply with the ACA’a “market reforms,” commonly referred to an a Healthcare Reimbursement Plan (HRP), the distributions should be made as an addition to net income with no FUTA, FICA or other tax withholdings. The distributions should be added to Box 1 of the shareholder’s W-2 at the end of the year but excluded from Box 3 (Social security wages) and Box 5 (Medicare wages and tips). The shareholder may then deduct the total amount spent on medical, dental and long-term care insurance for themselves and their family on line 29 of their 1040. Participation in the business’s reimbursement plan ensures the employee shareholder satisfies the IRS requirement of having the insurance established under the business. This information is also applicable to partners with net earnings from self-employment reported on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., box 14, code A.
17.03.2017
George Kelly, EA
No comments
Yes, you can have an HRA and an HSA at the same time and it is great... Okay, but there are some rules you have to follow and some extra work for the administrator. First, if you are making tax-free contributions to an HSA, the IRS requires  that individuals have a minimum deductible on their health insurance from all sources (including HRAs and QSEHRAs) in order to make tax deductible contributions to their Health Savings Account (HSA). We call this an HRA Deductible. However, there are some expenses that can be reimbursed through the HRA without regard to an HRA Deductible. These expenses include: Insurance premiums Wellness/preventive care Expenses resulting from accidents Dental expenses Vision expenses Real World Application It is important there is no confusion between having an HSA and making contributions to an HSA. Funds from an HSA can be used to pay for the qualified medical expenses of the account holder and her dependents, even if the account holder is no longer eligible to make contributions to an HSA. An HRA Deductible is only required in the year you are making tax-free contributions to an HSA. Your HRA Deductible has to equal high-deductible health plan (HDHP) minimum deductibles for the contribution year. Self-only: $1,350 Family: $2,700 for 2018.  So, I am a single employee with an HDHP and I am contributing $2,000 to an HSA in 2018. Also, my employer is offering a QSEHRA with a $3,600 annual benefit allowance. How do I comply with the IRS's HRA Deductible? Well, if I am paying an insurance premium on my HDHP, I can collect a reimbursement for that expense without regard to the deductible. I can also collect reimbursements for any dental or vision expenses I incur. For any other medical expenses,  I will continue to submit claims to the plan but I will write on the claim, "do not reimburse, apply to deductible." Once I then reach my deductible, all of my medical expenses going forward are reimbursable, up to the plan limit. Administrators, HRA Deductibles are a self-compliance feature. The administrator will have no visibility as to which employees are on HDHPs. HRA Deductibles should be considered only when a participant requests an HRA Deductible be applied to their account.  To track deductible in eTrack, add deductible amount underneath "Total HRA Eligible" row. Input expense but do not enter expense amount in the "Amount Paid" column. Instead, input amount to apply to deductible under "Amount Eligible." When the two figures are equal, the deductible has been met:

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A small plan with five employees and a $500 allowance can save a business $2,200 in payroll taxes, save employees $12,000 in payroll and income taxes and allow an employer a $30,000 expense deduction for employee benefits.

 

How much could your business save?

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IRS CIRCULAR 230 DISCLOSURE

 

Any tax advice contained on this website is not intended or written by the practitioner to be used, and cannot be used by any taxpayer, for the purpose of (i) avoiding penalties that may be imposed on the taxpayer, and (ii) supporting the promotion or marketing of any transactions or matters addressed herein.

 

Use of a disclaimer does not change the high degree of care and attention that we devote to our tax advice. Moreover, the inclusion of the disclaimer does not indicate that penalties could be imposed on the transaction at issue, but rather merely indicates that the advice we have provided you in such communication does not preclude the IRS from asserting penalties. Finally, the use of such a disclaimer to avoid unnecessary legal expenses is similar to the approach adopted by most tax practitioners.


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